CBDT Criteria For Selection Of Scrutiny Cases In FY 2013-14

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CBDT Criteria For Selection Of Scrutiny Cases In FY 2013-14

The CBDT has issued Instruction No. 10 of 2013 dated 05.08.2013 announcing the procedure and criteria for selection of scrutiny cases under the compulsory manual for FY 2013-14. The guidelines appear to have been issued pursuant to the direction of the Delhi High Court in Joginder Pal Gulati vs. OSD – CPIO

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Reebok India Co vs. ACIT (ITAT Delhi)

Transfer Pricing: Scope in the context of expenditure (royalty payment) explained

Transfer Pricing: ITAT Explains Law On Selection Of 'Tested Party'

 

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The following important judgement is available for download at itatonline.org.

General Motors India Pvt. Ltd vs. DCIT (ITAT Ahmedabad)

Transfer Pricing: Foreign associated enterprise can be taken as 'Tested Party'

The assessee bought CKD Kits from General Motor Daewoo Auto & Technology (GMDAT), a foreign associated enterprise. The assessee claimed that to determine whether the transactions were at arm's length, GMDAT had to be selected as the tested party on the ground that the functions and risks of the assessee are more complex in nature and that numerous adjustments would have to be made if the assessee were taken as the selected part. The TPO & DRP rejected the assessee's contention on the basis that (a) a foreign entity could not be a tested party, (b) GMDAT is a complex entity owing valuable intangibles & (c) the data for comparability of GMDAT is not available. On appeal by the assessee to the Tribunal, HELD:

While there is nothing in the transfer pricing law as to the selection of the tested party, the tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or foreign entity, i.e., one party to the transaction. The object of transfer pricing exercise is to gather reliable data, which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. It is also true that generally least of the complex controlled taxpayer should be taken as a tested party. But where comparable or almost comparable, controlled and uncontrolled transactions or entities are available, it may not be right to eliminate them from consideration because they look to be complex. If the taxpayer wishes to take foreign AE as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration. The taxpayer is not then entitled to take a stand that such data cannot be called for or insisted upon from the taxpayer. This is supported by the United Nation's Practical Manual on Transfer Pricing for Developing Countries which stated that a foreign entity (a foreign AE) could also be taken as a tested party for comparison. The revenue's argument that GMDAT should not be selected as a 'tested party' as it does not fall within the ambit of TPO's jurisdiction and he can neither call for any additional information nor scrutinize their books of accounts is not acceptable because the Revenue can get all the relevant particulars around the globe by using the latest technology under its thumb or direct the assessee to furnish the same (Ranbaxy Laboratories 110 ITD 428 (Del), Mastek Limited, Development Consultants 136 TTJ 129 & Sony India 114 ITD 448 (Del) followed; Onward Technologies (Mum) & Aurionpro Solutions (Mum) not followed/ distinguished)

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DCIT vs. Damani Estates & Finance Pvt. Ltd (ITAT Mumbai)

S. 14A/ Rule 8D: Scope in the context of shares held as stock-in-trade explained

ITR (TRIB) VOL 25 PART 4

 

ITR'S TRIBUNAL TAX REPORTS (ITR (TRIB)) -- PRINT AND ONLINE EDITION

 

ONLINE EDITION

SUBJECT INDEX TO CASES REPORTED

Charitable purposes --Definition--Amendment disqualifying assessee for exemption where commercial activity undertaken--Assessee entering into agreement with concessionaire for development of indoor cricket academy--Carrying on of commercial and profit motive activities for long duration--Not charitable or welfare activity--Effect of amendment of section 12AA(3 ) w. e. f. 1-6-2010--Cancellation of registration from 1-6-2010 not from date of signing of agreement--Income-tax Act, 1961 , s. 12AA(3) -- Mumbai Cricket Association v. Director of Income-tax (Exemption) (Mumbai) . . . 151

PRINT EDITION

Volume 25 : Part 4 (Issue dated : 5-8-2013)

SUBJECT INDEX TO CASES REPORTED

Appeal to Commissioner (Appeals) --Power to admit additional evidence--Assessee making out case of insufficient time for complying with requirement--Additional evidence to be admitted--Income-tax Rules, 1962, r. 46A-- Russian Technology Centre P. Ltd. v. Deputy CIT (Delhi) . . . 521

Business expenditure --Business--Commencement of business--Assessee not granted registration as vendor by Ministry of Defence as supplier--No supply taking place--Business of assessee not set-up--Expenditure rightly disallowed--Assessee after obtaining registration participating in tenders invited by Ministry of Defence--Assessee in state of readiness to obtain orders--Expenditure allowable--Income-tax Act, 1961, s. 37-- Russian Technology Centre P. Ltd. v. Deputy CIT (Delhi) . . . 521

----Disallowance--Payments liable to deduction of tax at source--Payments in respect of online advertising--Presence in India of non-resident only through its website--Does not constitute permanent establishment in India--Receipts not arising on account of any business connection in India--Service rendered by wholly automated process--No transfer of any technology--Not technical services--Income of non-resident not chargeable in India--Assessee not liable to deduct tax at source--Payment allowable--Income-tax Act, 1961, ss. 5(2), 9(1)(i), (vi), (vii), 40(a)(i), 195--Double Taxation Avoidance Agreement between India and Ireland, art. 12(2)(b)--Double Taxation Avoidance Agreement between India and the U. S. A., art. 12-- ITO v. Right Florists P. Ltd. (Kolkata) . . . 639

----Discount under employees’ stock option scheme--Employees cost--Not a capital expenditure--Not a contingent liability--Deductible during vesting period with reference to market price of shares at time of grant of options to employees--Discount claimed as deduction during vesting period to be reversed in relation to unvesting or lapsing options at appropriate time--Income to be adjusted at time of exercise of option by difference in discount calculated with reference to market price at time of grant of option and at time of exercise of option--Income-tax Act, 1961, ss. 17, 37, 43(2)-- Biocon Ltd. v. Deputy CIT (LTU) [SB] (Bangalore) . . . 602

----Employees stock option scheme--Discount on issue of options allowable as deduction--Income-tax Act, 1961, s. 37-- Biocon Ltd. v. Deputy CIT (LTU) [SB] (Bangalore) . . . 602

Capital or revenue expenditure --Artwork charges--Artwork having life of six months or less--No enduring advantage--Not capital expenditure--Income-tax Act, 1961-- Parle Agro P. Ltd. v. Assistant CIT (Mumbai) . . . 551

Cash credits --Burden of proof--Share application moneys--Shareholders non-resident entities--Balance-sheets, certificates of incorporation, confirmations and certificates of good standing, filed by assessee--Foreign inward remittance certificates showing remittance by banking channels--Approval of Foreign Investment Promotion Board to raise capital--Discharge of primary burden cast on assessee--Identity and creditworthiness of creditors and genuineness of transaction proved--Moneys received cannot be treated as income of assessee--Income-tax Act, 1961, s. 68-- Russian Technology Centre P. Ltd. v. Deputy CIT (Delhi) . . . 521

Costs --Department--Assessing Officer and Commissioner (Appeals) performing statutory functions--No case for imposition of costs on them-- Russian Technology Centre P. Ltd. v. Deputy CIT (Delhi) . . . 521

Deduction of tax at source --Recipient of income not having primary tax liability--Payer cannot have vicarious tax withholding liability--Income-tax Act, 1961, s. 195-- ITO v. Right Florists P. Ltd. (Kolkata) . . . 639

Depreciation --Rate of depreciation--Computer accessories and peripherals--Depreciation applicable at 60 per cent.-- Hughes Systique India P. Ltd. v. Assistant CIT (Delhi) . . . 556

Double taxation avoidance --Non-resident--Royalty--Definition in Agreement exhaustive--Amendment of definition in Act not applicable--Reimbursement to assessee by Indian company of lease line charges paid by assessee to overseas operators on behalf of Indian company--Not payment for use of equipment--Not royalty--Reimbursement at cost--Not taxable--Income-tax Act, 1961, s. 9(1)(vi), Expln. 5 --Double Taxation Avoidance Agreement between India and the U. S. A., arts. 3(2), 12-- WNS North America Inc. v. Assistant Director of Income-tax (International Taxation) (Mumbai) . . . 582

----Provisions of Act or of Agreement whichever more beneficial applicable to assessee--Effect of retrospective amendments to domestic law--Income-tax Act, 1961, s. 90(2)-- WNS North America Inc. v. Assistant Director of Income-tax (International Taxation) (Mumbai) . . . 582

Exemption --Export--Method of computation--Communication charges to be excluded from export turnover as well as total turnover--Income-tax Act, 1961, s. 10A-- Zavata India P. Ltd. v. Deputy CIT (Hyderabad) . . . 504

Income-tax authorities --Duties--Natural justice--If record available with Department and assessee points towards it--Authorities to verify that evidence and decide allowability-- Russian Technology Centre P. Ltd. v. Deputy CIT (Delhi) . . . 521

Income-tax --General principles--Accounting--No accounting principle determinative in computation of total income under Act--Effect of Guidelines issued by other authority-- Biocon Ltd. v. Deputy CIT (LTU) [SB] (Bangalore) . . . 602

International transactions --Arm’s length price--Determination--Appeal to Appellate Tribunal--Power to admit additional evidence--Applicability of comparable uncontrolled price method not properly dealt with by Dispute Resolution Panel and Transfer Pricing Officer--Documents subsequently procured and necessary for proper ascertainment of transfer pricing adjustment--Assessee prevented by sufficient cause from producing them in assessment proceedings--Additional evidence to be admitted--Issue of transfer pricing adjustment to be restored to Transfer Pricing Officer--Income-tax Act, 1961, s. 92CA(3)-- Hughes Systique India P. Ltd. v. Assistant CIT (Delhi) . . . 556

----Arm’s length price--Determination--Selection of comparables--Companies which have suffered events like merger or demerger, impacting financial results, those having supernormal profit, those functionally dissimilar, those acting as intermediary having outsourced their activity, those whose directors involved in fraud, those whose turnover exceeding Rs. 200 crores not to be treated as comparables--Direction to Assessing Officer to determine arm’s length price of each comparable objected by assessee--Matter remanded--Income-tax Act, 1961, s. 92C-- Zavata India P. Ltd. v. Deputy CIT (Hyderabad) . . . 504

Interpretation of taxing statutes --Noscitur a sociis-- ITO v. Right Florists P. Ltd. (Kolkata) . . . 639

Non-resident --Advance tax--Interest--Entire payments to non-resident liable to deduction of tax at source--Non-resident not liable for interest under sections 234B and 234C--Income-tax Act, 1961, ss. 234B, 234C-- WNS North America Inc. v. Assistant Director of Income-tax (International Taxation) (Mumbai) . . . 582

----Payment for marketing, management and sales support services to Indian company--Employees of assessee visiting India--Services provided in India and outside--No technical know-how made available--Assessee governed by Double Taxation Avoidance Agreement--Payment not for included services but business income to extent of services in India--Payment for service outside India not taxable--Income-tax Act, 1961, s. 9(1)(vi), Expln. 5 , (vii)--Double Taxation Avoidance Agreement between India and the U. S. A. art. 12(4)(b)-- WNS North America Inc. v. Assistant Director of Income-tax (International Taxation) (Mumbai) . . . 582

Words and phrases --“Expenditure†--Means not only “paying out“ but also “incurring“-- Biocon Ltd. v. Deputy CIT (LTU) [SB] (Bangalore) . . . 602

----“Technical service†-- ITO v. Right Florists P. Ltd. (Kolkata) . . . 639

 

SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

Double Taxation Avoidance Agreement between India and Ireland :

Art. 12(2)(b) --Business expenditure--Disallowance--Payments liable to deduction of tax at source--Payments in respect of online advertising--Presence in India of non-resident only through its website--Does not constitute permanent establishment in India--Receipts not arising on account of any business connection in India--Service rendered by wholly automated process--No transfer of any technology--Not technical services--Income of non-resident not chargeable in India--Assessee not liable to deduct tax at source--Payment allowable-- ITO v. Right Florists P. Ltd. (Kolkata) . . . 639

Double Taxation Avoidance Agreement between India and the U. S. A. :

Arts. 3(2) --Double taxation avoidance--Non-resident--Royalty--Definition in Agreement exhaustive--Amendment of definition in Act not applicable--Reimbursement to assessee by Indian company of lease line charges paid by assessee to overseas operators on behalf of Indian company--Not payment for use of equipment--Not royalty--Reimbursement at cost--Not taxable-- WNS North America Inc. v. Assistant Director of Income-tax (International Taxation) (Mumbai) . . . 582

Art. 12 --Business expenditure--Disallowance--Payments liable to deduction of tax at source--Payments in respect of online advertising--Presence in India of non-resident only through its website--Does not constitute permanent establishment in India--Receipts not arising on account of any business connection in India--Service rendered by wholly automated process--No transfer of any technology--Not technical services--Income of non-resident not chargeable in India--Assessee not liable to deduct tax at source--Payment allowable-- ITO v. Right Florists P. Ltd. (Kolkata) . . . 639

----Double taxation avoidance--Non-resident--Royalty--Definition in Agreement exhaustive--Amendment of definition in Act not applicable--Reimbursement to assessee by Indian company of lease line charges paid by assessee to overseas operators on behalf of Indian company--Not payment for use of equipment--Not royalty--Reimbursement at cost--Not taxable-- WNS North America Inc. v. Assistant Director of Income-tax (International Taxation) (Mumbai) . . . 582

Art. 12(4)(b) --Non-resident--Payment for marketing, management and sales support services to Indian company--Employees of assessee visiting India--Services provided in India and outside--No technical know-how made available--Assessee governed by Double Taxation Avoidance Agreement--Payment not for included services but business income to extent of services in India--Payment for service outside India not taxable-- WNS North America Inc. v. Assistant Director of Income-tax (International Taxation) (Mumbai) . . . 582

Income-tax Act, 1961 :

S. 5(2) --Business expenditure--Disallowance--Payments liable to deduction of tax at source--Payments in respect of online advertising--Presence in India of non-resident only through its website--Does not constitute permanent establishment in India--Receipts not arising on account of any business connection in India--Service rendered by wholly automated process--No transfer of any technology--Not technical services--Income of non-resident not chargeable in India--Assessee not liable to deduct tax at source--Payment allowable-- ITO v. Right Florists P. Ltd. (Kolkata) . . . 639

S. 9(1)(i), (vi), (vii) --Business expenditure--Disallowance--Payments liable to deduction of tax at source--Payments in respect of online advertising--Presence in India of non-resident only through its website--Does not constitute permanent establishment in India--Receipts not arising on account of any business connection in India--Service rendered by wholly automated process--No transfer of any technology--Not technical services--Income of non-resident not chargeable in India--Assessee not liable to deduct tax at source--Payment allowable-- ITO v. Right Florists P. Ltd. (Kolkata) . . . 639

S. 9(1)(vi), Expln. 5 --Double taxation avoidance--Non-resident--Royalty--Definition in Agreement exhaustive--Amendment of definition in Act not applicable--Reimbursement to assessee by Indian company of lease line charges paid by assessee to overseas operators on behalf of Indian company--Not payment for use of equipment--Not royalty--Reimbursement at cost--Not taxable-- WNS North America Inc. v. Assistant Director of Income-tax (International Taxation) (Mumbai) . . . 582

S. 9(1)(vi), Expln. 5, (vii) --Non-resident--Payment for marketing, management and sales support services to Indian company--Employees of assessee visiting India--Services provided in India and outside--No technical know-how made available--Assessee governed by Double Taxation Avoidance Agreement--Payment not for included services but business income to extent of services in India--Payment for service outside India not taxable-- WNS North America Inc. v. Assistant Director of Income-tax (International Taxation) (Mumbai) . . . 582

S. 10A --Exemption--Export--Method of computation--Communication charges to be excluded from export turnover as well as total turnover--Income-tax Act, 1961, Zavata India P. Ltd. v. Deputy CIT (Hyderabad) . . . 504

S. 17 --Business expenditure--Discount under employees’ stock option scheme--Employees cost--Not a capital expenditure--Not a contingent liability--Deductible during vesting period with reference to market price of shares at time of grant of options to employees--Discount claimed as deduction during vesting period to be reversed in relation to unvesting or lapsing options at appropriate time--Income to be adjusted at time of exercise of option by difference in discount calculated with reference to market price at time of grant of option and at time of exercise of option-- Biocon Ltd. v. Deputy CIT (LTU) [SB] (Bangalore) . . . 602

S. 37 --Business expenditure--Business--Commencement of business--Assessee not granted registration as vendor by Ministry of Defence as supplier--No supply taking place--Business of assessee not set-up--Expenditure rightly disallowed--Assessee after obtaining registration participating in tenders invited by Ministry of Defence--Assessee in state of readiness to obtain orders--Expenditure allowable-- Russian Technology Centre P. Ltd. v. Deputy CIT (Delhi) . . . 521

----Business expenditure--Discount under employees’ stock option scheme--Employees cost--Not a capital expenditure--Not a contingent liability--Deductible during vesting period with reference to market price of shares at time of grant of options to employees--Discount claimed as deduction during vesting period to be reversed in relation to unvesting or lapsing options at appropriate time--Income to be adjusted at time of exercise of option by difference in discount calculated with reference to market price at time of grant of option and at time of exercise of option-- Biocon Ltd. v. Deputy CIT (LTU) [SB] (Bangalore) . . . 602

----Business expenditure--Employees stock option scheme--Discount on issue of options allowable as deduction-- Biocon Ltd. v. Deputy CIT (LTU) [SB] (Bangalore) . . . 602

S. 40(a)(i) --Business expenditure--Disallowance--Payments liable to deduction of tax at source--Payments in respect of online advertising--Presence in India of non-resident only through its website--Does not constitute permanent establishment in India--Receipts not arising on account of any business connection in India--Service rendered by wholly automated process--No transfer of any technology--Not technical services--Income of non-resident not chargeable in India--Assessee not liable to deduct tax at source--Payment allowable-- ITO v. Right Florists P. Ltd. (Kolkata) . . . 639

S. 43(2) --Business expenditure--Discount under employees’ stock option scheme--Employees cost--Not a capital expenditure--Not a contingent liability--Deductible during vesting period with reference to market price of shares at time of grant of options to employees--Discount claimed as deduction during vesting period to be reversed in relation to unvesting or lapsing options at appropriate time--Income to be adjusted at time of exercise of option by difference in discount calculated with reference to market price at time of grant of option and at time of exercise of option-- Biocon Ltd. v. Deputy CIT (LTU) [SB] (Bangalore) . . . 602

S. 68 --Cash credits--Burden of proof--Share application moneys--Shareholders non-resident entities--Balance-sheets, certificates of incorporation, confirmations and certificates of good standing, filed by assessee--Foreign inward remittance certificates showing remittance by banking channels--Approval of Foreign Investment Promotion Board to raise capital--Discharge of primary burden cast on assessee--Identity and creditworthiness of creditors and genuineness of transaction proved--Moneys received cannot be treated as income of assessee-- Russian Technology Centre P. Ltd. v. Deputy CIT (Delhi) . . . 521

S. 90(2) --Double taxation avoidance--Provisions of Act or of Agreement whichever more beneficial applicable to assessee--Effect of retrospective amendments to domestic law-- WNS North America Inc. v. Assistant Director of Income-tax (International Taxation) (Mumbai) . . . 582

S. 92C --International transactions--Arm’s length price--Determination--Selection of comparables--Companies which have suffered events like merger or demerger, impacting financial results, those having supernormal profit, those functionally dissimilar, those acting as intermediary having outsourced their activity, those whose directors involved in fraud, those whose turnover exceeding Rs. 200 crores not to be treated as comparables--Direction to Assessing Officer to determine arm’s length price of each comparable objected by assessee--Matter remanded-- Zavata India P. Ltd. v. Deputy CIT (Hyderabad) . . . 504

S. 92CA(3) --International transactions--Arm’s length price--Determination--Appeal to Appellate Tribunal--Power to admit additional evidence--Applicability of comparable uncontrolled price method not properly dealt with by Dispute Resolution Panel and Transfer Pricing Officer--Documents subsequently procured and necessary for proper ascertainment of transfer pricing adjustment--Assessee prevented by sufficient cause from producing them in assessment proceedings--Additional evidence to be admitted--Issue of transfer pricing adjustment to be restored to Transfer Pricing Officer-- Hughes Systique India P. Ltd. v. Assistant CIT (Delhi) . . . 556

S. 195 --Business expenditure--Disallowance--Payments liable to deduction of tax at source--Payments in respect of online advertising--Presence in India of non-resident only through its website--Does not constitute permanent establishment in India--Receipts not arising on account of any business connection in India--Service rendered by wholly automated process--No transfer of any technology--Not technical services--Income of non-resident not chargeable in India--Assessee not liable to deduct tax at source--Payment allowable-- ITO v. Right Florists P. Ltd. (Kolkata) . . . 639

----Deduction of tax at source--Recipient of income not having primary tax liability--Payer cannot have vicarious tax withholding liability-- ITO v. Right Florists P. Ltd. (Kolkata) . . . 639

S. 234B --Non-resident--Advance tax--Interest--Entire payments to non-resident liable to deduction of tax at source--Non-resident not liable for interest under sections 234B and 234C-- WNS North America Inc. v. Assistant Director of Income-tax (International Taxation) (Mumbai) . . . 582

S. 234C --Non-resident--Advance tax--Interest--Entire payments to non-resident liable to deduction of tax at source--Non-resident not liable for interest under sections 234B and 234C-- WNS North America Inc. v. Assistant Director of Income-tax (International Taxation) (Mumbai) . . . 582

Income-tax Rules, 1962 :

R. 46A --Appeal to Commissioner (Appeals)--Power to admit additional evidence--Assessee making out case of insufficient time for complying with requirement--Additional evidence to be admitted-- Russian Technology Centre P. Ltd. v. Deputy CIT (Delhi) . . . 521

 

Section 14A/ Rule 8D To Shares Held As Stock-in-Trade

 

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The following important judgement is available for download at itatonline.org.

DCIT vs. Damani Estates & Finance Pvt. Ltd (ITAT Mumbai)

S. 14A/ Rule 8D: Scope in the context of shares held as stock-in-trade explained

In AY 2008-08, the assessee, a trader cum investor in shares, offered Rs. 10 lakhs as disallowance u/s 14A. It claimed that the amount invested in shares was funded by its own, non-interest bearing funds and that there was no direct expenditure relatable to the investments. The AO applied Rule 8D and computed the disallowance at Rs. 1.40 crore. On appeal, the CIT(A) upheld the stand of the assessee as to the quantum of the disallowance. On appeal by the department, the Tribunal had to consider (i) whether s. 14A applies to shares held as stock-in-trade?, (ii) whether it could be said that the expenditure having been incurred for the share trading business, no expenditure can be said to be in relation to the dividend income?, (iii) whether it can be argued that the investment in tax-free securities is made out of own funds and no disallowance of interest on borrowed funds can be made?, (iv) whether Rule 8D(2)(ii) which deals with interest expenditure not directly attributable to any particular income or receipt requires modification if the dominant purpose is to earn share trading income?, (v) Whether Rule 8D(2)(iii) which prescribes the ratio in respect of indirect expenditure can be modified if the dominant purpose is to earn share trading income? & (vi) whether the allowance for depreciation u/s 32 has to be excluded in computing the disallowance? HELD by the Tribunal:

(i) S. 14A gets attracted on incurring of expenditure in relation to tax-exempt income. The purpose for which the shares are purchased and held would not impact the applicability of s. 14A. S. 14A comes into play irrespective of the head of income (on account of it arising qua a trading asset) under which the income is assessable. The fact that the share trading business yields both taxable income in the form of share trading profit and tax-exempt income by way of dividend income makes no difference to the applicability of s. 14A. Accordingly, s. 14A applies to shares held as stock-in-trade;

(ii) The argument that all expenditure has been incurred for the share trading business and that there is no additional expenditure incurred for earning dividend is not acceptable because though the expenditure is incurred for the purpose of the business of share trading, the said business yields taxable and non-taxable income. It is the integral activity of purchase and holding the shares which generates two separate streams of income. Accordingly, some of the expenditure has to be attributed to the dividend income;

(iii) The argument that investment in shares yielding tax-free dividend income has been made out of own funds and so no interest expenditure has been incurred in relation to the dividend income is not acceptable. No presumption of investment of own funds, on ground of its sufficiency, on the basis of Reliance Utilities and Power Ltd 313 ITR 340 (Bom) can be drawn;

(iv) If Rule 8D(2)(ii) which quantifies the interest on the investments, income from which is not taxable, on a proportionate basis, is applied literally, it will lead to absurd results because then the entire interest relatable to the average share holding will be attributed to the tax exempt dividend income even though the shares are bought and held primarily for share trading income. Rule 8D(2)(ii) needs to be scaled down by bifurcating the expenditure so arrived at between the tax-free and the taxable incomes. Given that the dominant objective of the share holding is to earn share trading income, an ad hoc ratio of 20% toward tax-exempt dividend income will be reasonable. Accordingly, in arriving at the disallowance u/r 8D, the amount as per Rule 8D(2)(ii) qua shares held as stock-in-trade would be restricted to 20% thereof;

(v) Rule 8D(2)(iii) which prescribes the ratio of indirect expenditure required to support an investment need not be modified because though the expenditure prescribed for disallowance is based only on one variable, i.e. the average value of investments, the prescribed allocation ratio of 0.5% of the investment value qua indirect expenditure is very nominal and not harsh;

(vi) Depreciation – an economic and accounting concept – statutorily recognized and provided, is only a charge on capital account, i.e., a capital expenditure. It has to be excluded in computing the s. 14A disallowance (Daga Capital 117 ITD 169 (Mum)(SB), Dhanuka & Sons 339 ITR 319 (Cal) & American Express Bank followed; CCI Ltd 71 DTR (Kar) 141, Leena Ramachandran 339 ITR 296 (Ker) & Yatish Trading not followed; Godrej & Boyce 328 ITR 81 (Bom) & Walfort Share and Stock Brokers 326 ITR 1 (SC) referred/ followed).

Note: Though the appeal against Daga Capital 117 ITD 169 (Mum)(SB) is pending in the Bombay High Court, given the conflict on whether s. 14A applies to stock-in-trade or not (Damani Estates & American Express Bank hold that it does while Yatish Trading, India Advantage & Gulshan Investments hold that it does not) the matter deserves to be referred to a 5 Member Special Bench in view of the High Court verdicts in CCI Ltd 71 DTR (Kar) 141 & Leena Ramachandran 339 ITR 296 (Ker)

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CBDT Directive Regarding Special Counters For Filing Returns

CBDT Directive Regarding Special Counters For Filing Returns

 

Dear Subscriber,

CBDT Directive Regarding Special Counters For Filing Returns

The CBDT has vide letter dated 31.07.2013 stated that special counters have been opened for acceptance of returns on Saturday and Sunday to facilitate taxpayers.

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Latest:

ITO vs. Karnavati Petrochmem Pvt. Ltd (ITAT Ahmedabad)

S. 14A/ Rule 8D: Interest expenditure has to be netted against interest income and only the difference, if any, can be considered for disallowance

Section 14A/ Rule 8D Disallowance Of Interest If Income Exceeds Expenditure (ITAT Ahd, Kol And Mumbai)

 

Dear Subscriber,

 

The following important judgement is available for download at itatonline.org.

ITO vs. Karnavati Petrochmem Pvt. Ltd (ITAT Ahmedabad)

S. 14A/ Rule 8D: Interest expenditure has to be netted against interest income and only the difference, if any, can be considered for disallowance

In AY 2008-09, the assessee invested Rs. 95 lakhs in shares on which it earned Rs. 300 as dividend. The AO applied Rule 8D and made a disallowance of Rs. 15 lakhs. The assessee claimed that no expenditure had been incurred to earn the dividend income on the basis that while the interest expense was Rs. 1.83 crore, the interest income was Rs. 1.86 crore and there was a net surplus interest income of Rs. 3.79 lakh. The CIT(A) held that the AO had not established a nexus between the expenditure incurred and the tax free income and that as the assessee had net positive interest income, there could be no disallowance of the interest expenditure u/s 14A read with Rule 8D. He sustained the disallowance at 0.5% of the average investment. On appeal by the department HELD dismissing the appeal:

No nexus has been established by the AO between the expenditure incurred by the assessee and the tax free income earned by him. Further, as the interest income was more than interest expense and the assessee was having net positive interest income, the interest expenditure cannot be considered for disallowance u/s 14A and Rule 8D (Trade Apartment (ITAT Kol) & Morgan Stanley (ITAT Mum) (both included in the file) followed)

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Latest: CBDT Order U/s 119 Extending The Due Date For Filing The ROI

CBDT Order U/s 119 Extending The Due Date For Filing The ROI

Dear Subscriber,

CBDT Order U/s 119 Extending The Due Date For Filing The ROI

Further to the Press Release, the CBDT has issued an order u/s 119 of the Income-tax Act, 1961 extending the due date for filing the return to 05.08.2013.

Please download a pdf copy of the Order for your records.

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ACIT vs. Robert Arthur Keltz (ITAT Delhi)

ESOP to expatriate employee of foreign company not chargeable for period he was outside India even if ESOP was vested and exercised in India