Critical Issues in Corporate Taxation

Critical Issues in Corporate Taxation

CRITICAL ISSUES IN CORPORATE TAXATION Saturday, 23rd June, 2012 ICAI Bhawan Baroda Pradip N. Kapasi Chartered Accountant 1 Deemed Dividend- 1 Tax in the hands of shareholders or recipients Bhaumik Colour, 120 TTJ 865 (Mum.) (SB) Universal Medicare, 237 CTR 147 (Bom.) Registered & Beneficial Owner Hotel Hilltop, 217 CTR 527 (Raj.) Ankitech (P) Ltd., 242 CTR 129 (Del.)

Where partnership is a recipient National Travel Service, 202 Taxman 327 (Del.) Chandmull Batia, 115 ITR 388 (Cal.) Where beneficiary; HUF, Trust, AOP, BOI, Company Pradip N. Kapasi Chartered Accountant 2 Deemed Dividend- 2 Book Entry or no economic benefit Swati Energy & Projects Pvt. Ltd., 11 ITR (Trib.) 705 (Mum.)

Loan to a debenture holder Anilkumar Agarwal, 132 ITD 314 (Mum.) Loan form one subsidiary for advance to another Farida Holdings Ltd., 51 SOT 452 (Chennai) Two or more persons with substantial interest None. Anyone. Proration Pradip N. Kapasi Chartered Accountant 3 Minimum Alternative Tax- 1 Priority of credit u/s 115JAA over SC & EC Classic Shares & Securities (Mum.), ITA No. 5869/Mum/2007

Withdrawal from reserves Indo Rama Synthetics Ltd. 2011-TIOL-01-SC Capital Gains credited to Reserves Akshay Textile Trading, 304 ITR 401 (Bom.) Kopran Pharmaceuticals, 309 ITR 146 (AT) (Mum.) Deduction u/s 80HHC Al Kabeer Exports Ltd. 32274 of 2010 (SC) Bhari Infotech Systems 328 ITR 380 (Mad.) FA 2011 Amendment Pradip N. Kapasi Chartered Accountant

4 Minimum Alternative Tax- 2 Depreciation at different rates Malayala Manorama Ltd, 300 ITR 251 (SC) Dynamic Orthopedics, 321 ITR 300 (SC) Loss on reduction in share capital Sumi Motherson, 2010-TIOL-756-Delhi Finance Act, 2012 Amendments. Compulsory credit( addition) to Book Profit Revaluation reserve on retirement or disposal of asset Year of debit S.211(2) Proviso company special P&L Account

Banking, Insurance, Electricity companies Pradip N. Kapasi Chartered Accountant 5 Amalgamation & Demerger s.47(vii)(a), s.2(19AA) & s. 72A S.47(vii) and s.2(19AA) W.e.f. 01.04.2013, A.Y. 2013-14 Saving from allotment of shares in consideration Where concerned company a shareholder Prospective application, only Set-off of losses of amalgamated company- Reverse merger Wrigley India (P) Ltd., 142 TTJ 23 (Del.) Pradip N. Kapasi Chartered Accountant

6 Income during Construction Period Tuticorin Alkali, 227 ITR 172 (SC)-Interest Bokaro Steel, 236 ITR 315 (SC)-Rent Neha Proteins Ltd, 306 ITR 102 (Raj.)- Set-off Winsome Dyeing, 10 DTR 207 (HP) -Taxable L.G. Electronics, 309 ITR 265 (Del.)-Set-off Pradip N. Kapasi Chartered Accountant 7 Public Offer & Exemption u/s 10(38) Amendment

of Finance Act, 2012 for STT Sale of promoters shares Private deal SPA Price Difference Subsequent Listing on recognised Stock Exchange Difficulty for s. 10(38) exemption up to A.Y. 2012-13 Bulk window & Block deal mechanism SEBI circular, MRD/SE-7 dt. 14.01.2004 Guidelines Possible tax implications Cost of controlling interest Pradip N. Kapasi Chartered Accountant 8

Receipt of shares - s.56(2)(viia) - 1 Receipt of shares of a non s. 2(18) company By firm and company recipients s. 2(18) company excluded LLP included With/out consideration > Rs. 50,000, whole FMV as per Rule 11UA By or From Resident or not Substantive not clarificatory Shares Preference shares included CD not included Rights not included - Shares of subsidiaries Pradip N. Kapasi Chartered Accountant 9

Receipt of shares-2 Exclusion for transfers s. 47(via),(vic),(vicb),(vid),(vii) Amalgamation, demerger, co-op. bank succession No exclusions Similar to s. 56(2)(vii) Relative, etc. For stock-in-trade For shares of foreign companies For other exempted transfers For deemed transfers Adjustment in purchase cost W.e.f. 01.06.2010 Pradip N. Kapasi Chartered Accountant

10 Receipt of shares - 3 COA in hands of recipient s.49(4) o Subjected to tax u/s 56(2)(vii) & (viia) o Value that is taken into account COA in cases where FMV < Rs. 50,000 S. 49(4) and s. 49(1) Period of holding and s. 2(42A) o o o

Business receipts Receipts on distribution On credit by payer Deductions admissible Pradip N. Kapasi Chartered Accountant 11 Receipt of premium- s.56(2)(viib)- 1 Issue of shares by closely held company, A.Y. 2013-14 Receipt by a CHC from a resident Consideration for issue of shares Where exceeds face value

Tax on excess over FMV of shares -Rs.50,000 Exemption for issue by VCC, VCF and VCU FMV as per prescribed method or satisfaction of A.O. Non resident, R&NOR Preference shares Income of the company Pradip N. Kapasi Chartered Accountant 12 Receipt of premium - 2 Expenditure allowance Set-off of loss Rate of taxation Objective behind amendment

Application of s.68 Bonus/Right entitlement/Right/CD ESOP/ESOS Pradip N. Kapasi Chartered Accountant 13 VCC/VCF- s.10(23FB) & s.115U W.e.f. 01.04.2013-A.Y. 2013-14 Scope of Venture Capital Undertaking expanded Sectoral restriction of the specified business removed VCU approved under SEBI Regulation of 1996 governing VCF Scope of s. 115U amended Income received to income accruing or arising to or received

Income paid to income paid or credited Investor to be taxed on entitlement Irrespective of credit in the books- deemed credit on the last day Advanced taxation Expl. 2 w.e.f. 01.07.2012 inserted to remove double taxation Pradip N. Kapasi Chartered Accountant 14 DDT- s.115-O (IA) W.e.f. 01.07.2012 One cascading effect of DDT on Dividend relaxed Distribution by recipient domestic company eligible for relief Need not be an ultimate holding company May be subsidiary of another upstream company

Concession only for group companies Pradip N. Kapasi Chartered Accountant 15 Liquidation s. 46 -1 COA of asset in the hands of shareholder FMV on the date of distribution Not to be reduced by Deemed dividend S. 49 (1)(iii)(c) and s. 55(2)(b)(iii) - applicability T.R.Srinivasan, 133 TTJ 49(Chennai) Piecemeal taxation and deduction of COA Cable and Wireless Ltd., 90 ITR 84 (Bom)

Inland Agencies (P) Ltd., 143 ITR 186 (Mad) Benefit of reinvestment Ruby Trading Co. P. Ltd., 259 ITR 54 (Raj) Brahmi Investment P. Ltd., 48 TTJ 326(Ahd.) Exemption distribution of qualifying asset Purchase or not for s. 54F Pradip N. Kapasi Chartered Accountant 16 Liquidation s. 46 - 2 Distribution of stock - other asset Taxability of capital gains

Receipt of an agricultural land N. Bagavathy Ammal, 259 ITR 678 (SC) Where shares were held as stock-in-trade G. Rajam & Anr., 64 CTR (Mad) 256 Taxable as capital gains COA indexation and POH on subsequent sale Applicability of s. 50C DTC effect and period of holding Pradip N. Kapasi Chartered Accountant 17 Deemed Speculation

Loss & Profit Samba Trading& Investment, 58 TTJ 360(Mum) Application to a Broker Priyasha Mever Finance P.Ltd., 5 ITR 441 (Mum)(Trib.) Relevance of legislative intent AMP Spg. & Wvg. Mills (P) Ltd., 101 TTJ 1113 (Ahd.)(SB) Excl. of speculation loss for deciding applicability Paramount Info. Systems P.Ltd., 42-A BCAJ 169(Mum),

Set-off of Explanation loss and amendment of 2006 Virendrakumar Jain, 42-A BCAJ 169(Mum.) Pradip N. Kapasi Chartered Accountant 18 Share Capital and s.68- amendments Three Amendments of FA, 2012- w.e.f. A.Y. 2013-14 Law of cash creditors upto A.Y. 2012-13 Provisions. Essentials. Case Laws. Rate Expanding and extending onus for certain receipts Share capital. Share premium. Like receipts From resident- VCC & VCF excluded Closely held company

Pradip N. Kapasi Chartered Accountant 19 Share Capital and s.68 Onus to explain sources of source of receipt Payer to offer explanation- nature & source Satisfaction of AO On notice by AO to Payer Relevance of satisfaction of Payers AO Consequence Income of CHC Tax at 30% u/s 115BBE Absence of discretion Pradip N. Kapasi Chartered Accountant

20 Case Law on Share Capital Lovely Exports (P) Ltd., 216 CTR 195 (SC) Shareholders name & address Steller Investment Ltd., 115 Taxman 99 (SC) Non- genuine (Owners of Funds) Divine Leasing, 158 Taxman 440 (Del.) Non- genuine (Owners of Funds) Onus shifts to AO to examine capacity

Pradip N. Kapasi Chartered Accountant 21 Case Law on Source of Source of Capital S. Hastimal, 49 ITR 273 (Mad.) Tolaram Daga, 59 ITR 632 (Assam) Sarogi Credit Corpn., 103 ITR 344 (Pat.) Pradip N. Kapasi Chartered Accountant 22 Share Capital and s.68 - Issues Receipt of such amount by whatever name called Preference Shares. CD. Mergers. Para IX. Rights. Sweat-Equity

R& NOR, change of status Conversion of loan into equity Expenditure for issue of capital Set-off of losses Pradip N. Kapasi Chartered Accountant 23 Share Capital and s.68- Issues Motivation of payer Dual taxation Year of taxation Credit in share capital account Pradip N. Kapasi Chartered Accountant 24

Loan to Subsidiary- s.36(1)(iii) Interest free and investment in shares commercial expediency S.A. Builders, 288 ITR 1 (SC) Tulip star Hotels Ltd. (SC) Effect of s.14A on investment in shares Pradip N. Kapasi Chartered Accountant 25 ESOP & DOA Date of offer or grant or allotment Dr. Dhurjati Gupta, 127 TTJ 356 (Hyd.) Pramod H. Lele, 143 TTJ 721 (Mum.)

Pradip N. Kapasi Chartered Accountant 26 Method of Accounting, AS & Company S.209 of Companies Act Cash system of accounting Stup Consultants Pvt. Ltd., 13 ITR (Trib) 468 (Mum.) Pradip N. Kapasi Chartered Accountant 27 VRS & s.35DDA Scheme to be in accordance with Rule 2BA Implication of non-compliance

Warner Lambert, 143 TTJ 571 (Mum.) Sony India Ltd., 141 TTJ 432 (Del.) Pradip N. Kapasi Chartered Accountant 28 Corporatization & s.47(xiii) Time for issue of shares Prakash Electric Co., 118 TTJ 539 (Bang.) Sanjay Singh., (2012) 19 taxmann.com 88 (Del.) Pradip N. Kapasi Chartered Accountant 29 Disallowance u/s 14A - 1

Adequacy of owned funds Reliance Utilities Ltd., 313 ITR 340 (Bom.) Position u/s 14A for owned funds Bunge Agribusiness Ltd., 142 TTJ 817 (Mum.) Applicability to MAT Goetze (India) Ltd., 32 SOT 101 (Del.) Rule 8D and Stock-in-trade CCI Ltd., ITA no. 359 of 2011 (Karnataka) Catholic Syrian Bank, 237 CTR 164 (Ker.) Maxopp Investment, 203 Taxman 364 (Del.) Leena Ramachandran, 235 CTR 512 (Ker.) Pradip N. Kapasi Chartered Accountant

30 Disallowance u/s 14A - 2 Interest (net or gross) Morgan Stanley P. Ltd., 3077/M/2005 Higher interest income Trade Apartment Ltd., 1277/Kol/2011 Gillette Group, 267/Del/2012 Lakshmi Ring Travellers, 2083/Chen/2011 Administration Expenses @ 0.5% Philips Carbon Black, 566/Kol/2009 Pradip N. Kapasi Chartered Accountant

31 Intangibles for s.32 Membership of stock exchanges Techno Shares & Stocks, 327 ITR 323 (SC) Business & Commercial rights Osram India (P) Ltd., 51 DTR 297 (Del.) Areva T&D, 315 of 2010 (Del.) - Customers ONGC Videsh, 37 SOT 97 (Del.) - Prospection Ashoka Info, 123 TTJ 77 (Pune) - Toll collection License Piem Hotels, 135 TTJ 228 (Mum.)

Brand on amalgamation KEC International Ltd., 41 SOT 43 (Mum.) Goodwill Pradip N. Kapasi Chartered Accountant 32 Exchange Fluctuation Currency translations year end Maruti Udyog Ltd., 320 ITR 729 (SC) Woodward Governor , 312 ITR 254 (SC) Loss on refund of advance received Loksons Pvt. Ltd., 11 DTR 206 (Bom)

Rollover premium and S. 36(1)(iii), 43A Elecon Eng. Ltd., 322 ITR 20 (SC) Loss on advance against sales Taiko CNCPL, 311 ITR 475(Delhi) Forex forward contracts Open ended Nature of loss Accounting Taxation Pradip Kapasi & Co.

33 Non- Compete Fees Payers perspective Revenue or capital Depreciation- tangible or intangible Payees perspective Capital receipts- capital gains, s. 55(2) Business income s.28(va) Guffic Chem Ltd., 332 ITR 602 (SC)

Late Dr. B.V. Raju, 14 ITR (Trib.) 387 (Hyd.) Tecumseh Ltd., 127 ITD 1 (Del.) (SB) Ramesh D. Tainwala, 48 SOT 324 (Mum.) Savita N. Mandhana, 3900/M/2010 Hami Aspi Balsara, 30 DTR 576 (Mum.) Pitney Bowes (P) Ltd., 204 Taxman 333 (Del.) Pradip N. Kapasi Chartered Accountant 34 Disallowance u/s 40(a)(ia) & TDS Paid and Payment Merilyn Shipping,146 TTJ 1 (Vizag) (SB) Short withholding, rate or section Bunge Agribusiness Ltd., 142 TTJ 817 (Mum.)

Chandabhoy & Jassobhoy, 49 SOT 448 (Mum.) Beekaylon Synthetics, 6506/M/2008 (Mum.) S.K. Tekriwal, 1135/Kol/2010 (Kol.) Second proviso and retrospectability Bharati Shipyard, 132 ITD 53 (Mum.) (SB) Virgin Creations, ITA No. 302 of 2011 (Cal.) Rajamahendri Shipping, 51 SOT 242 (Vizag) Kotak Securities Ltd., 340 ITR333 (Bom.) DICGC Ltd., 14 ITR (Trib) 194 (Mum.) Dynamic Vertical Software, 332 ITR 222 (Del.) FA, 2012 Amendment Relief Pradip N. Kapasi Chartered Accountant

35 THANK YOU Pradip N. Kapasi Chartered Accountant 36

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