No sec. 14A disallowance if no exempt income earned; CBDT circular can’t override express provision

The issue before the High Court was as under:

Whether the disallowance of the expenditure will be made even where the investment had not resulted in any exempt income during the AY?

High Court held in favour of assessee as under:

1) Section 14A does not clarify whether the disallowance of the expenditure would apply even where no exempt income is earned.

2) The words "in relation to income which does not form part of the total income under the Act for such previous year" in the Rule 8D(1) indicate a correlation between the exempt income earned in the AY and the expenditure incurred to earn it. In other words, the expenditure as claimed by the Assessee had to be in relation to the income earned in 'such previous year'.

3) This implies that if there was no exempt income earned in the relevant AY, the question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A, read with Rule 8D could not arise.

4) CBDT's Circular No. 5/2014 dated 11-02-2014 does not refer to Rule 8D(1) at all but only refers to the word "includible" occurring in the title to Rule 8D as well as the title to Section 14A. The Circular concluded that it was not necessary that exempt income should necessarily be included in a particular year's income for the disallowance to be triggered.

5) For all of the aforementioned reasons, the CBDT Circular (Supra) couldn’t override the express provisions of Section 14A, read with Rule 8D. Therefore, if no exempt income was earned, there could be no disallowance of expenditure in terms of section 14A, read with Rule 8D. [2017] 84 taxmann.com 186 (Delhi)

Treatment of Gift and Perquisites under GST

The Goods and Services Tax (GST), the biggest economic reform, has been implemented in India since 01 July 2017. Every new thing comes out with fresh challenges, similar is the case with GST. With the passage of GST in India, there seem to be humongous challenges revolving around Gift and Perquisites provided by an Employer to their Employees.

In terms of GST Laws, CGST and SGST or IGST shall be levied on supply of goods or services or both. Further, the supply includes activities as specified in Schedule I to GST Act even if made without consideration. Accordingly, tax will be levied on all such activities.

Entry 2 of Schedule I states

"Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business" "Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both". Further, as per Section 15 of the GST Laws, employer and employee are considered as "related parties". On reading of the said entry, we understand that gifts provided by an employer to employee exceeding fifty thousand rupees are leviable to tax. However, the term "Gift" has not been defined under the GST Laws. Accordingly, the term gift is open for interpretation

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NDTV created a complex structure of subsidiaries to enter into sham dealings; HC affirms reassessment

Facts:

a) New Delhi Television Ltd (NDTV) had filed writ petition against the notice proposing reassessment proceedings initiated under section 147/148.

b) The Assessing Officer (AO) was of the view that the amount received by NDTV from foreign subsidiaries was actually its unaccounted money and was a sham transaction.

c) Assessee contended that the "reasons to believe" supplied by the AO did not substantiate on how it had failed to disclose all material facts and instead merely repeated the statutory language. It further argued that during regular scrutiny assessment, AO had made requisite inquiries with respect to foreign investments.

The Delhi High Court held in favour of revenue as under:

1. AO had taken into account several specific tax evasion petitions received from shareholder of the NDTV that money introduced in foreign subsidiary through money laundering activities was actually transferred to the NDTV through liquidations and mergers.

2. The Director of the complainant company was part of the team of NDTV at some point of time, which designed the complex corporate structure to route and reroute funds with layering of funds. Further, complaints against NDTV were received from the shareholder wherein details regarding the raising and routing of funds through round tripping were given. 

3. AO took note of information contained in these tax evasion petitions, because the complaints of tax evasion were received from NDTV's shareholders, who were aware of its internal affairs and aim and object of floating complex corporate structure by the NDTV; therefore, the AO had reason to believe that information was credible.

4. The complex and circuitous structure of subsidiaries and the transactions entered into therein were closely connected and provided a live link for the formation of the belief of the AO that there had been escapement of income.

5. Therefore, AO was justified in forming an opinion that prima facie amount so received represented assessee's own unaccounted money which had escaped assessment and, thus, validity of reassessment proceedings initiated by him deserved to be upheld. [2017] 84 taxmann.com 136 (Delhi)

Sec. 54F relief allowable even when multiple flats are sold to purchase one big flat: ITAT

Facts:

a) Assessee had sold 5 house properties during the years 2009-10 to 2011-12 and invested sale consideration in construction of another property, i.e., Mehandi Farms. He claimed deduction under section 54F for investment in Mehandi Farms against the capital gain on sale of house properties.

b) Assessing Officer held that assessee had already availed deduction under section 54F for investment in construction of Mehandi Farms in the year 2009-10 and therefore, he couldn’t be allowed deduction in construction of the same residential property for capital gain arising in succeeding years.

c) On appeal, CIT(A) allowed section 54F relief to assessee. Aggrieved-revenue filed the instant appeal before the Tribunal.

Tribunal held in favour of assessee as under:

1) Section 54F provides that any capital gain arising from the sale of any long term capital asset shall be exempt from tax if the entire sales proceeds is invested in:

i) Purchase of one residential property within 1 year before the date of sale or 2 years after the due date of transfer of the property sold or

ii) Construction of a residential house property within a period of 3 years from the 2) Construction of the house property at Mehandi Farms was not completed and therefore same couldn’t be termed as another residential property for disqualification for deduction under section 54F.

3) There is also no bar in the section 54F for claiming deduction for second time or third time for the same property if the cost of the property is equivalent to or more than the amount of capital gain.

4) In the given case, total capital gain in all the three years 2009-10 to 2011-12 was less than the cost of construction of new residential property. Therefore, assessee was eligible for the deduction under section 54F. [2017] 84 taxmann.com 141 (Delhi - Trib.)

Service Permanent Establishment-Changing Landscape?

Old age English proverb "Necessity is the mother of all inventions" is very apt owing to which last century has witnessed tremendous advancement in the field of technology. Technology has enormously impacted the way businesses function or the manner in which corporate transactions are structured.

Today physical presence of personnel is not necessary in order to conduct business in another state. Jobs can be performed over emails, telephones, mobiles, video conferencing etc. Whether, conducting business using technology, which to a large extent eliminates the requirement of physical presence 'on-site (client place)', constitute as the presence of the multinational enterprise in the source state so as to constitute its permanent establishment ('PE') in the source state1?

This question has been answered in negative (i.e. against the taxpayer) by Hon'ble Bangalore Tribunal in a recent judgment in the case of ABB FZ-LLC v. Dy. CIT (International Taxation), Circle-1(1), and Bengaluru.

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ICDS IX - Borrowing cost: An Analysis

Deductibility of interest on borrowing cost has been subject matter of litigations in the past on several accounts, viz., deductibility of borrowing cost for purchase of capital asset, deductibility of commitment charges, interest on capital borrowed for earning exempt income, interest on borrowed capital for circular trading, etc.

Income Computation and Disclosure Standard ('ICDS') has been designed to provide clarity on various contentious tax issues at the time of computing taxable income. ICDS IX contains authoritative guidance on situations that require capitalization of borrowing cost. Accordingly, the treatment of not all types of borrowing costs is iterated in ICDS IX. On the contrary, the scope of ICDS IX is limited to the issue of capitalization of borrowing cost in certain cases. The treatment of borrowing cost for the purposes of deductibility from profit and loss account continues to be governed by section 36(1)(iii) and section 57(iii).

Definition of Borrowing cost as per ICDS and section 2(28A) of the Income Tax Act, 1961 The definition of interest as per section 2(28A) of the Act states as follows 'interest payable in any manner in respect of any moneys borrowed or debt incurred'. However, as per ICDS IX, the definition of borrowing cost as contained in para 2(1)(a) is as follows: "Borrowing costs" are interest and other costs incurred by a person in connection with the borrowing of funds and include:

(i) commitment charges on borrowings;

(ii) amortised amount of discounts or premiums relating to borrowings

(iii) amortised amount of ancillary costs incurred in connection with the arrangement of borrowings;

(iv) finance charges in respect of assets acquired under finance leases or under other similar arrangements."

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Sec. 68 couldn't be applied for sundry creditors arising out of purchase expenses: Patna ITAT

Facts:

a) Assessee-partnership firm had shown sundry creditors arising out of purchase expenses in its return but failed to establish genuineness of such sundry creditors.

b) Assessing Officer (AO) disallowed provision for such creditors and added it to total income of assessee under section 68.

c) CIT (Appeals) confirmed the order of AO. The aggrieved-assessee filed the instant appeal before the Tribunal.

The ITAT held in favour of assessee as under:

1) The provisions of section 68 are applied to the cash credit which has not been explained by assessee. In the instant case sundry creditors arose out of the purchases as claimed by assessee which had been duly accepted by the authorities.

2) AO had invoked section 68 to tax the sundry creditors whereas the assessee was claiming that the aforesaid amount represented the trade creditors and, therefore, it couldn’t be applied.

3) Admittedly, the creditors were found by the AO and the onus lay on assessee to justify that these were sundry creditors. In order to justify the impugned trade creditors, the assessee had to produce copies of PAN, ledger copies, bills / invoices details of payments, income tax return, mode of payments, etc.

4) In the instant case, assessee had summarily failed to observe the directions issued by the AO. Therefore, issue was restored to AO for fresh adjudication as per law. - [2017] 83 taxmann.com 187 (Patna - Trib.)

Compensation paid to clients due to negligence of employees was allowable as business exp.

Facts:

a) Assessee was engaged in Marketing of Financial products of various companies as distributor. He claimed Rs.1.54 lakh as expenses in its profit and loss account on account of compensation paid to clients for loses occurred due to negligence of on the part of its employees.

b) Assessing officer (AO) held that assessee had not been able to prove as to how the loss was payable by it as the losses were suffered by the clients and, therefore, assessee was not entitled to claim such losses its profit and loss account.

c) CIT (Appeals) also upheld order of AO. Aggrieved-assessee field the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1) Assessee had claimed that the losses which had occurred to its clients due to negligence of employees as the employees of assessee could not square off the positions taken by clients in NIFTY index of National Stock Exchange.

2) Amount paid to these clients was necessarily an exp. which was allowable under section 37 as section 37 clearly states that any expenditure not in the nature of capital expenditure or personal expense laid out or expenditure wholly and exclusively incurred for the purposes of business or profession shall be allowed.

3) Moreover Circular no. 35-DCXLVII-20 of 1965 dated 24-11-1965, clearly states that losses arising due to negligence of employees has to be allowed as expense if loss took place in normal course of business

4) In the instant case, the losses were necessarily incurred in the normal course of business of assessee and therefore, the expenditure was allowable. - [2017] 83 taxmann.com 230 (Amritsar - Trib.)

Ind AS: Exposure Draft of revised lease standard Ind AS 116 issued

Exposure Draft on revised lease standard Ind AS 116 has been issued by the Institute of Chartered Accountants of India (ICAI). Ind AS 116 will replace the existing lease standard Ind AS 17. Last year, International Accounting Standards Board (IASB) revised the lease standard and issued new IFRS 16, Leases.

Ind AS 116, Leases sets out the provisions for the recognition, measurement, presentation and disclosures of leases. There are differences between Ind AS 116 and Ind AS 17. The major differences are as follows:

1. Under Ind AS 116, a part of the contract can also be treated as lease if the same conveys the right to use an asset for a period of time for certain consideration.

2. The principles of Ind AS 116 with regards to accounting of lease by the lessee is substantially different from that of Ind AS 17. However, requirements of Ind AS 116 with regard to lessor is substantially similar to Ind AS 17

3. Recognition of leases having lease term less than 12 months or value of underlying asset of the lease is low, by lessee is not mandatory under Ind AS 116. In such cases, lessee have to recognise the lease rentals as expense on a systematic basis considering pattern of benefits from the asset.

4. Ind AS 116 provides for a single accounting model for lessee. Classification of lease as either finance or operating lease by the lessee is not required under Ind AS 116. Initially, lessee should recognise right-of-use assets at cost similarly to other non-financial assets, like property, plant & equipment, intangible assets etc. and lease liabilities at the present value of all future payments.

5. Subsequently, lessee should measure the right-of-use assets either at cost or other specified models like revaluation model. The amount of interest paid on lease liability should be recognised as finance cost.

6. Under Ind AS 116, lessee shall depreciate the right-of-use asset in accordance with Ind AS 16, Property, Plant and Equipment.

Apart from this the Draft also provides principles with regard to transition from Ind AS17 to Ind AS 116. Ind AS 116 will be applicable from April 1, 2019. 

The full Exposure Draft can be accessed here.

No TDS on GST paid or payable on services when GST is separately shown in invoice: CBDT

CBDT had issued Circular No.1/2014 wherein it was clarified that TDS had to be deducted on the amount paid/payable without including service tax component. In other words, no TDS would be deducted on service tax component when amount of service tax is shown separately in the invoice.

After implementation of GST across the country with effect from July 1, 2017, CBDT has received various references for treatment of GST component on services. Now the CBDT has clarified (vide Circular 23/2017) that if as per terms of the agreement of the payee and payer ‘GST on services’ component has been indicated seperately in the invoice, then no tax would be deducted on GST component. GST will include CGST, SGST, IGST, UTGST.