No Sec. 14A disallowance if taxpayer has not earned any exempt income in that year, rules Delhi HC

IT: Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.

Facts:

1)  The disputed issue in the instant case was:

Whether disallowance under Section 14A can be made in a year in which no exempt income has been earned or received by assessee?

2)  The Special bench in [2009] 121 ITD 318 (DELHI)(SB) held that Section 14A disallowance can be made in year in which no exempt income has been earned or received by assessee. It referred to the decision of Apex Court in case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 to settle this controversy. 

The High Court held in favour of assessee as under:

1)  The Special Bench has relied upon the decision of the Supreme Court in Rajendra (Supra). In such case the Supreme Court held that Section 57(iii) does not say that expenditure shall be deductible only if any income is made or earned. The decision of Supreme Court was rendered in context of allowability of deduction under Section 57(iii). Thus, such decision could not be used in reverse to content that even if no income has been received, the expenditure incurred can be disallowed under Section 14A.

2)  The expression ‘does not form part of total income in Section 14A envisages that there should be an actual receipt of income, which is not includible in the total income, for the purpose of disallowing any expenditure in relation to said income.

In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year- Cheminvest Ltd. v. CIT [2015] 61 taxmann.com 118 (Delhi)

Editor’s Note:

Section 14A provides for disallowance of expenditure in relation to income not "includible" in total income. The legislative intent is to allow deduction of only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not.

The above position is further clarified by the usage of term 'includible' in the Heading to section 14A which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered.

Thus, in light of above, CBDT, vide Circular No. 5/2014 dated 11-2-2014 had clarified that Rule 8D read with section 14A provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income.

The Delhi High Court had not referred to this Circular in its verdict.

Clearing members and brokers of 'commodity derivative exchange' are included in SEBI norms

On Sept 3, 2015 the Government had notified the merger of Forward Markets Commission (FMC) with SEBI with effective from September 28, 2015 and, accordingly, the “Forward Contracts Regulation Act (FCRA) 1952 will get repealed and Regulation of Commodity Derivatives Market will shift to SEBI under Securities Contracts Regulation Act (SCRA) 1956 with effect from Sept 28, 2015.

Now Ahead of FMC merger with SEBI itself, SEBI has notified crucial amendments relating to stock exchanges and clearing corporations. Amendments have been made in SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 and Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012. These new norms will also come into force on September 28, 2015, the date from which SEBI shall start regulating the commodity derivatives market as a unified regulator

Key highlights of the amendments are:

1)    Clearing member, Brokers and Clearing Corporations of Commodity derivative exchange and SEBI brought together:

Now definition of ‘clearing member’ and ‘self-clearing member’ has been amended to include any person having clearing and settlement rights on a commodity derivatives exchange

Earlier the ‘clearing member’ meant a person having clearing and settlement rights in any recognised clearing corporation

2)     Annual regulatory fees For members Dealing In Commodity Derivatives:  Under amended norms, a regional commodity derivatives exchange shall have to pay to SEBI an annual regulatory fee of Rs 50,000 within 30 days of conclusion of the relevant financial year, according to the amended norms.

3)    Net worth and Deposits requirements for Members dealing in Commodity Derivatives –Under amended norms, in the case of national commodity derivatives exchanges, the net worth for a self clearing member should be Rs 1 crore and for a clearing member, the same should be Rs 3 crore.

The deposit amount in the case of national commodity derivative exchange would be Rs 50 lakh for both self-clearing and clearing members. 

4)    3-years transitional period for settlements under new SEBI norms: Under amended norms, the Commodity derivative Exchanges have been allowed to continue with the existing arrangement for clearing and settlement of trades for a period not exceeding three years from the date of commencement of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) (Amendment) Regulations, 2015.

ITAT withdraws adverse remark against ICAI and its members; it conveyed unintended message to public

IT: The Tribunal had made certain observations about CA profession, the conduct of students pursuing the CA courses and also about the ICAI in its order. ICAI was of the view that such observations of ITAT had been viewed by public at large that ITAT had found fault with conduct of ICAI. Thus, ICAI filed miscellaneous application for removal of such observations. ITAT was of the view that such observations had not conveyed the intended message, thus, it replaced that paragraph (containing such observation) of its order.- Vijay V. Meghani v. ACIT [2015]

61 taxmann.com 114 (Mumbai - Trib.)

Facts:

a)    The Institute of Chartered Accountants of India (ICAI) had filed this miscellaneous application with the submissions that some of the observations made by the Tribunal in case of Vijay V. Meghani v. Dy. CIT [2014] 49 taxmann.com 88 (Mumbai - Trib.) had resulted in a mistake apparent from record and, hence, the same needs rectification under Section 254(2) of the Income-Tax Act.

b)    The Ld. Counsel appearing for ICAI had submitted that Tribunal had made certain observations about CA profession, the conduct of students pursuing the CA courses and also about the ICAI in the impugned order. Such observations made by the Tribunal in paragraph 9.6 of the order had been interpreted or understood by the public at large in a manner that the Tribunal had found fault with the conduct of the ICAI. Accordingly, he submitted that such observations made by the Tribunal had led to unintended results affecting reputation of ICAI.

c)  Paragraph 9.6 is reproduced below:“However, if it is considered for a moment that the above said C.A firm has really given such advice to the assessee herein and accordingly it has furnished the letter and affidavit, then, in our view, it may be showing signs of deteriorating standards with some of the Chartered Accountants in profession, which needs to be stopped on war footing by the ICAI…

If it is presumed for a moment that all the C .A.s have concurred with the said view, then it only shows that the C .A profession is losing its grip over the Income tax matters, which is another cause of concern for ICAI…

We notice that the ICAI does not appear to have taken steps to contain mushrooming growth of such coaching institutes, which indulge in manufacturing of Chartered Accountants through class room model, which may ultimately have undesirable effect on the quality of Chartered Accountants, since the habit of thinking, introspection, application of mind is replaced by spoon-feeding, which kind of teaching discourages independent thinking…

Any compromise on the quality of Chartered Accountants would not only affect our Country very badly, but is also expected to endanger the pioneer position enjoyed by the Indian C.A fraternity vis-à-vis their counter parts in other parts of the world. In our view, the ICAI should seriously take note of these alarming practices slowly emerging in our Country and should take appropriate corrective steps, lest the confidence reposed in C .A.s by the public should get diluted”.

Held:

1) The observations made by the Tribunal about the CA profession and conduct of the students pursuing the CA course were not necessary to adjudicate the issues that were urged before the Tribunal by the appellant, Sri Vijay V Meghani. However, the Tribunal being a part of Government of India, should not shut its eyes when it notices that certain developments occurring in the Country may affect the Country as a whole, more particularly when the reputation of particular profession, from whom the Tribunal is getting assistance in the dispensation of justice, is at stake. There cannot be any controversy that the interest of our Country is supreme and no citizen can or should compromise on the same. The observations were made in the impugned order in that context only and it was not the intention to target any particular person or the ICAI.2)  The observations made by the Tribunal in the later part of paragraph 9.6 were intended to highlight or reiterate the importance of the articled clerk training and the self-study model conceived by the ICAI and the same was intended only to give a wake-up call to the students pursuing C.A profession. However, it appeared that the observations made in paragraph 9.6 had not conveyed the message intended by the Tribunal.

3)  According to Ld. Counsel, the said observations had given room for misinterpretation and resultant controversies. Accordingly, the paragraph 9.6 of the order was modified as under:

“However, if it is considered for a moment that the above said C.A. firm has really given such advice to the assessee herein and accordingly it has furnished the letter and affidavit, then it is

“However, if it is considered for a moment that the above said C.A. firm has really given such advice to the assessee herein and accordingly it has furnished the letter and affidavit, then it is

a cause of concern to one and all. We have already noticed that the self study model coupled with „on-site articled clerk training‟ embedded in the Chartered Accountancy course aims to achieve high quality education and training. The articled clerk training conceptualized in the C.A education inculcate the habit of thinking, self introspection, application of mind, analytical ability etc and they enable the C.A students to have strong grip over the subjects and help achieving expertise in the domain fields. The commendable feature of the C.A Course is that, as stated earlier, the C.A students are given training by practicing Chartered Accountants during their articled clerk training program. Thus the methodology adopted by the ICAI enables the C.A. students to become thorough professionals with versatile knowledge and innovative mind. The practical training given by the practicing Chartered Accountants during the articled clerk period, in our view, is the fulcrum centre of the study module of the C.A course and the students pursuing the C.A course should and must utilize the opportunities provided to them or encountered by them during the articled clerk training period to the maximum possible extent. In the recent past, a number of Coaching institutes have been established to give coaching to the students pursuing C.A course. While the self study model and articled clerk training may be supplemented with the coaching given by such institutes, any compromise on the practical training intended during articled clerk period or mere obtaining a C.A degree without practical training would not make the students full fledged chartered accountants and the same would go against the self study model conceptualized by ICAI and there should not be any doubt that it may have undesired results, which may affect the Country as a whole.”

Matter of smuggling of gold even through baggage can't be entertained by SetCom

In case of matters relating to import/smuggling of 'gold', even as part of a baggage, no settlement application can be filed in view of specific bar contained in third proviso to section 127B(1) read with section 123.

Facts:

a)  Assessee imported approximately 6.5kg gold as part of his baggage.

b)    Since assessee had not shown same in baggage declaration, department alleged smuggling and issued a show cause notice.

c)  Assessee approached Settlement Commission.

d)   Department argued that since it was a case of import of gold, settlement application was barred under third proviso to section 127B(1). Third proviso to section 127B(1) reads as: “Provided also that no application under this sub-section shall be made in relation to goods to which section 123 applies or to goods in relation to which any offence under the Narcotic Drugs and Psychotropic Substances Act, 1985 (61 of 1985) has been committed”

e)  Settlement Commission overruled revenue's objections and settled the matter.

High Court held in favour of revenue:

1) In view of provisions relating to application for settlement, particularly third proviso to section 127B(1), it is evident that no application for settlement can be made if it relates togoods to which section 123 applies and said section specifically provides that it applies to gold.

2)   Third proviso only makes a reference to goods to which section 123 applies and not to section 123 itself. Therefore, there is no question of examining provisions of section 123(1) as also its applicability because that is not context of third proviso to section 127B(1).

3)   Therefore, no application for settlement can be made in relation to gold. Since this case clearly pertains to gold, Settlement Commission did not have jurisdiction to entertain such an application - Additional Commissioner of Customs v. Ram Niwas Verma [2015] 61 taxmann.com 2 (Delhi). 

SEBI notifies listing norms

SEBI has notified SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’). A time period of 90 days has been allowed to companies to implement these regulations. However, two provisions of the regulations shall be applicable with immediate effect namely,

i.   Rules governing passing of ordinary resolution instead of special resolution in case of all material related party transactions and

ii.      Rules on re-classification of promoters as public shareholders under various circumstances.

With a view to provide ease of reference, regulations have been structured by consolidating into one single document across various types of securities listed on the Stock exchanges.

The regulations provides for– Guiding Principles under (Chapter II); Common obligations applicable to all listed entities under (Chapter III); Obligations which are applicable to specific types of securities under (Chapter III to IX); Obligations of stock exchanges and provisions in case of default under (Chapter X & XI); Ease of Reference; and ensures streamlining and segregation of initial issuance/listing obligations;

Further, wherever necessary, the provisions in Listing Regulations have been aligned with those of the Companies Act, 2013. The regulations prescribe a short version of the Listing Agreement of approximately (2 pages) which would be made available very soon. The short version of Listing Agreement is required to be signed by a company getting its securities listed on Stock Exchanges

It is to be noted that the Listing regulations consolidates and streamlines the provisions of existing listing agreements for different segments of the capital market viz., i) Equity (including convertibles) issued by entities listed on the Main Board of the Stock Exchanges, Small and Medium Enterprises listed on SME Exchange and Institutional Trading Platform, ii) Non-Convertible Debt Securities, iii) Non Convertible Redeemable Preference Shares, iv) Indian Depository Receipts, v) Securitized Debt Instruments and Units issued by Mutual funds schemes.

Key highlights of the regulations are outlined as under:

1.   Applicability: The regulations shall apply to the listed entity who has listed any of the designated securities on recognised stock exchange(s)

2.  Common Obligations Of Listed Entities: The listed entity shall have to ensure that key managerial personnel, directors, promoters or any other person dealing with the listed entity, complies with responsibilities or obligations, if any, assigned to them under these regulations

3.  Related party transactions: The regulation allows companies to approve any material related party transactions by passing an ordinary resolution instead of special resolution however, it should be noted that the related parties shall have to abstain from voting on such resolutions.

So far, SEBI norms required a vote by two-thirds of majority shareholders for a special resolution before a related-party transaction could be passed. This has now been reduced to 50%, on the lines of the Companies Act. The move would make it easier for listed companies to clear such deals.

4.   Appointment of Company Secretary as Compliance Officer: A listed entity shall appoint a qualified company secretary as the compliance officer who shall be responsible for ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit; co-ordination with and reporting to the Board, recognised stock exchange(s) and depositories with respect to compliance with rules, regulations and other directives; Monitoring of grievance redressal division. This move would open a world of opportunities for Company Secretaries profession.

5.    Principles governing disclosures and obligations: The listed entity shall make disclosures and abide by its obligations under the regulations in accordance with the principles such as:

i)  preparation and disclosure of information in accordance with applicable AS and financial disclosure

ii)   Conduct of audit by an independent, competent and qualified auditor.

iii)    Refraining from providing misrepresentation to recognised stock exchange(s) and not misleading the investors.

iv)  Providing adequate and timely information to recognised stock exchange(s) and investors

v)  Filings, reports, statements, documents and information which are event based or are filed periodically shall contain relevant information etc. 

Even un-availed cash discount is deductible if it is known prior to clearance of goods

Cash discount known at or prior to clearance of goods is to be deducted from sale price in order to arrive at value of excisable goods even if discount is not actually availed.

Facts:

a)  As per agreement buyers were eligible for 'cash discount'.

b)  Assessee claimed deduction of 'cash discount' in arriving at 'assessable value' even in cases where same was not actually availed of by buyers.

c)  Department argued that cash discount could be allowed only if it was actually allowed in price actually paid and not in cases where buyer did not avail of cash discount.

Supreme Court held in favour of assessee as under:

1)  On each removal of excisable goods, transaction value of such goods must be determined. Transaction value means the price actually paid or payable for the goods, when sold.

2)  Transaction value has to be read along with expression "for delivery at time and place of removal". Therefore, value of excisable goods on basis of transaction value has only to be at time of removal, that is, time of clearance of goods from assessee's factory or depot.

3)  Expression actually paid or payable for the goods, when sold means whatever is agreed to as price for goods forms basis of value, whether such price has been paid, has been paid in part, or has not been paid at all. Basis of transaction value is therefore agreed contractual price.

4)   Expression when sold is not meant to indicate time at which such goods are sold, but is meant to indicate that goods are subject matter of an agreement of sale. Hence, cash discount which is known at or prior to clearance of goods, being contained in agreement of sale between assessee and its buyers, must therefore be deducted from sale price in order to arrive at value of excisable goods at time of removal.

5)   Hence, cash discount was deductible for arriving assessable value of goods - Purolator India Ltd. v. Commissioner of Central Excise, Delhi-III [2015] 60 taxmann.com 471 (SC).

PLI of BPO can't be compared with PLI of KPO for transfer pricing analysis

Facts:

a) Assessee was providing voice base customer care services, i.e., BPO to its Associated Enterprises (‘AE’).

b) The Assessing Officer (‘AO’) made certain additions to transactions with AE on basis of comparables chosen by TPO.

c)  Assessee argued that two companies chosen by TPO were not comparable as such companies were basically providing knowledge process outsourcing (KPO) services.

Held:

1) As per Rule 10B(2)(a) of income-tax Rules, 1962 the comparability of the transactions should be judged with reference to service/product characteristics.

2)  The perception that a BPO service provider may have the ability to move up the value chain by offering KPO services could not be a ground to benchmark transactions of BPO service provider with the transactions of KPO services providers.

3)  A KPO includes involvement of advance skills normally; the services provided may include analytical services, market research, legal research, engineering and design services, intellectual management etc. On the other hand, Voice Call Centers are normally involved in customer support and processing of routine data.

4) Comparability analysis by TNMM method may be less sensitive to certain dissimilarities between the tested party and the comparables. However, that could not be the consideration for diluting the standards of selecting comparable transactions/entities. A higher product and functional similarity would strengthen the efficacy of the method in ascertaining a reliable Arm’s length Price. Therefore, as far as possible, the comparables must be selected keeping in view the comparability factors as specified.

5) Thus, where the tested party was not a KPO service provider, an entity rendering KPO services could not be considered as a comparable for the purposes of Transfer Pricing analysis. – RAMPGREEN SOLUTIONS (P.) LTD. V. CIT - [2015] 60 taxmann.com 355 (Delhi)

How payment banks will be a game changer for you?

On August 19, 2015 the RBI had granted ‘in principle’ approval to 11 entities for establishment of payment banks, which include established ones like Reliance Industries, Aditya Birla, Tech Mahindra, Airtel and Vodafone. The 'in-principle' approval shall be valid for a period of 18 months during which the applicants shall have to comply with the stipulated guidelines and fulfil other conditions as may be laid down by the RBI.

A payment bank is a type of non-full service niche bank in India. It can only receive deposits and provide remittances. It cannot carry out lending activities.

Payment banks are created to help a country to reach its financial inclusion targets. It is expected of payment banks to target migrant labourers, low-income households and small businesses by offering small savings accounts and remittance services with a low transaction cost.

What services payment banks can render?

§  Accept demand deposits of upto Rs. 100,000 per individual customer.

§  Issue ATM/debit cards usable on ATM networks of all banks.

§  Make payments and provide remittance services through various channels.

§  Act as a Corporate Business Correspondents of another bank (BCs), subject to the RBI’s guidelines on BCs.

§  Distribution of mutual fund units and insurance products, etc

What activities payment banks cannot undertake

§  The payments bank cannot undertake lending activities; they cannot offer loans and cannot raise a deposit exceeding Rs. 1 lakh

§  Payments banks cannot issue credit cards.

How payment banks will benefit people?

RBI has granted in-principle approval to entities which have experience in different sectors and which possess different capabilities so that different models could be tried. All selected entities would have wide reach and adequate technological and financial strength to service customers across the country. Their likely impact on Indian banking system is listed out hereunder:

Cash less banking: The 11 approved entities include phone companies which have large distribution networks throughout India, including in rural remote locations. The phone companies will essentially rely on technology to provide banking services to all customers, using mobiles as the vehicle of banking which will help them to reach people living in remote areas. They will be able to easily convert cash into virtual money and vice versa.  

They can offer services such as automatic payments of bills, and purchases in cashless, chequeless transactions through a simple phone. They can transfer money directly to bank accounts at nearly no cost acting as a part of the gateway that will connect with banks.

Cheaper banking services: Cheaper baking services will be available for people as banking costs will come down due to intense competition in banking sector after introduction of 11 new entities as payment banks. At present private banks like HDFC Bank, ICICI Bank and Axis Bank make huge profits from their low-cost current and savings bank accounts. Now a big chunk of their banking services will move to payment banks, who will offer higher savings bank rates of 5 to 7 %[1].
Facilitation of Government’s subsidy schemes: Government subsidies like subsidy on LPG, kerosene or food and fertiliser will be routed through payment banks which would have a greater reach.