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Direct Tax Vista Your weekly Direct Tax recap Edn. 5 – 10th May 2022 By Vivek Jalan Partner, Tax Connect Advisory Services LLP |
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1. Reincarnation of Section 148 Cases: Supreme Court invokes Article 142 and the judgement for both, Taxpayers and CBDT
The cat and mouse game ongoing from last one year is settled. All notices u/s 148 issued between 1st April 2021 to 30th June 2021 under the old Section 148 for AY 2015-16 to AY 2017-18 related to points herein below will be back in action and within 30 days from 4th May 2022 department will provide information and material relied by revenue in this regard. The assessee needs to respond within 2 weeks!
Income tax department had issued notices u/s 148 for reassessment proceedings. CBDT’s notification No. 20/2021, dated 31-03-2021 extended the last for issuance of notice u/s 148 upto 30.06.2021. The Assesses challenged the validity of such notices in High Courts and relief was granted to Assesses to which Special Leave Petition was filed by CBDT. Supreme Court of India in the case of Union of India Vs Ashish Agarwal [2022-VIL-13-SC-DT], invoked Article 142 of Constitution and passed an order validating such notices and they shall be deemed to have been issued under section 148A of the Income Tax Act, as substituted by the Finance Act, 2021. Such Notices shall be treated as show cause notices in terms of section 148A(b) of the Income Tax Act.
Generally, the Supreme Court makes use of Article 142 to intervene in complex cases related to the environment, history and religion. The Hon’ble Court believed that current situation where 9000 notices were issued, was sufficient for invoking the said powers. The Apex Court ruled that the Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated.
1. This judgement mainly involves notices related to Assessment Years from AY 2013-14 to AY 2017-18. The Court has validated the Reassessments notices which were issued after 01-04-2021. However, the assessee will get the information, material, opportunity and two weeks’ time to present their case as per provisions of section 148A(b) and where department agrees to Assessee’s submission, there they will pass an order u/s 148A(d) stating that it is not a fit case to issue notice u/s 148.
2. Reassessment Notices for AY 2013-14 and 2014-15 shall be considered as invalid by virtue of first proviso to Section 149. As per the 1st proviso of the section 149 notices related to AY 2014-15 and earlier years got time barred and no notice could have been issued on or after 1st April 2021.
3. Notices for AYs 2015-16, 2016-17 & 2017-18 shall survive only if the alleged escaped income represented in the form of an asset, exceeds Rs 50 lakhs, in each of such assessment year.
4. In case assessee is aggrieved by the 148A(d) order and feels that his submission was not dealt properly, then assessee can go for writ before HC against this impugned order issued u/s 148A(d).
5. For cases where addition has already been made and order has been passed by the Assessing Officer, there assessee may take plea before the appellate authorities for setting aside the order for de novo and to follow appropriate procedure as held by SC.
6. Notices for AY 2018-19 and onwards, have already been issued under new provisions and as such were not the subject matter of consideration in the SC judgement.
2. Taking a receipt to the balance sheet and not routing through income and expenditure account shows that it is a corpus donation
Accounting is the foundation of taxation. If books of accounts are suitably maintained, then taxation issues can be efficiently handled. In the 4th Edition of Direct Tax Vista we discussed how Netting of Reimbursement of expenditure (As Pure Agents) with the expenditure can be a ground for reopening.
Similarly accounting a receipt of a donation from one of the trustees towards building fund and taking it directly to the balance sheet, came to the rescue of DAS BAHUUDDESHY VISHWAST SANSTHA Vs EXEMPTION WARD. It was held by the ITAT Pune in the case 2022-VIL-546-ITAT-PNE, that such accounting practise amply shows that the amount was received as a corpus donation and hence not chargeable to tax. The assessee was running one school. The case of the assessee was that the amount was a corpus donation and hence, not chargeable to tax, which was jettisoned by the authorities by treating it as a chargeable receipt.
3. ‘Foreseen liability’ is not an ‘uncertain obligation’: Hence allowed
The liability (for discounts/ sales return, etc) for which a provision is made and which is certain at the balance sheet date and the assessee discharges its liability before finalization of income tax return, means that it is a foreseen liability of the assessee and therefore it is allowable. It cannot be construed as an uncertain contingent obligation. The same was held in the case of THE ASST. COMMISSIONER OF INCOME-TAX Vs M/s BAYER BIOSCIENCE PVT. LTD. [2022-VIL-542-ITAT-MUM].
4. Loss suffered on the transactions of trading in derivatives in a stock exchange can be set off against the income from business carried on, u/s Section 70
The trading in derivatives is not a speculative transaction. Section 73 (1) as well as the explanation inserted by Taxation Laws (Amendment) Act, 1975 with effect from 01.04.1977 would not apply to the loss having arisen in the trading in derivatives being not speculative transaction which is excluded from the definition of “speculation transaction” described under Section 43 (5) of the Income Tax Act. Thus an assessee is entitled to claim set off of the loss suffered in the said transactions in derivatives against the business income under Section 70 of the Income Tax Act 1961. The same was held in the case of SOUVENIR DEVELOPERS (I) PVT. LTD. Vs THE UNION OF INDIA [2022-VIL-115-BOM-DT].
5. TP Adjustment for Guarantee Commission is 0.5% and Interest on Loan is LIBOR+2%
Consistently it has been held by various Benches of the Tribunal and High Courts that 0.5% of the guarantee commission is at arm’s length. The same has been again upheld by the Hon’ble ITAT Delhi in the case of SBS TRANSPOLE LOGISTICS PVT. LTD. Vs ACIT [2022-VIL-555-ITAT-DEL]. Further it has been held that LIBOR + 2% is reasonable for benchmarking the interest rate for Interest on loan to AEs.
6. CBDT inserts new Rule 2DCA Computation of minimum investment & exempt income for Section 10(23FE)
Section 10(23FE) of the Income-tax Act provides that income in the nature of dividend, interest, or long-term capital gains of a wholly-owned subsidiary of the Abu Dhabi Investment Authority or a sovereign wealth fund or a pension fund (herein called specified person) shall be exempt from tax.
Exemption under this provision shall be available if the investment is made between 01-04-2020 and 31-03-2024 at least for 3 years in the following entities:
a) An Infrastructure investment trust (InVITs);
b) An enterprise carrying on the business of developing, or operating and maintaining, or developing, operating and maintaining any infrastructure facility as defined under Section 80-IA(4)(i) or other notified business; or
c) A Category-I or Category-II Alternative Investment Fund having more than 50% investment in any entity as referred in point (a) or (b) or (d) or (e).
d) A domestic company registered on or after 1st April, 2021 having minimum 75% investments in one or more of the company or enterprise as referred in point (b).
e) A non-banking financial company registered as an infrastructure finance company having minimum 90% of its lending to one or more of the companies or enterprises or entities referred in point (b) above.
f) An Infrastructure debt fund having minimum 90% lending to one or more of the companies or enterprises or entities referred to in point (b) above
The Central Board of Direct Taxes (CBDT) has notified Rule 2DCA for computation of investment referred above in points (c), (d), and (e) and exempt income for the purpose of section 10(23FE).
Every Alternative Investment Fund, a domestic company, and non-banking finance company, which has received funds from any specified person shall furnish the details of funds in Form 10BBD for each previous year during which such funds remain invested. Form 10BBD shall be furnished electronically on or before the due date specified under section 139(1).
Circular No. 9 of 2022 has also been issued providing the Guidelines under clause (23FE) of section 10 of the Income-tax Act, 1961.
7. Section 154 cannot be invoked on debatable issues
Disallowance of Interest to partner not allowed by the partnership deed is a debateable issue and not a mistake apparent from record. The Order u/s 154 was thus quashed in the case of M/s ALLIED AGENCIES Vs ITO [2022-VIL-541-ITAT-DEL].
8. RBI increases REPO Rate to respond to Tectonic shifts caused by the conflict in Europe
Tectonic shifts are caused by the conflict in Europe which had created fresh challenges for global growth and the conduct of monetary policy. As the war draws on and sanctions and retaliatory actions intensify, shortages, volatility in commodity and financial markets, supply dislocations and, most alarmingly, persistent and spreading inflationary pressures are becoming more acute with every passing day. Debt distress is rising in the developing world amidst capital outflows and currency depreciations. Recent GDP releases suggest that the global economic recovery is losing pace.
Against this backdrop, the Monetary Policy Committee (MPC) decided to increase the policy repo rate by 40 basis points to 4.40 per cent, with effect from 4th May 2022. Consequently, the standing deposit facility (SDF) rate stands adjusted to 4.15 per cent; and the marginal standing facility (MSF) rate and the Bank Rate to 4.65 per cent. The MPC also decided to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth.
Despite challenges, it is comforting to note that the fundamentals of India’s economy remain strong and we are well placed to deal with the situation emanating from the global developments. The IMF has also recently pointed out that the macroeconomic management of the pandemic in India has resulted in a strong recovery and the country is in a good position to face the current external shock.
9. Unusual for a wealthy NRI to take gift from father and brother, but there is no prohibition too
Taxation has to rely on evidences and not Act according to Customs in the society. As such a gift received by an NRI from his father and brother is allowed in the case of ATUL H. PATEL Vs I.T.O. [2022-VIL-537-ITAT-AHM], citing that there is no prohibition for the NRI for accepting the gifts from the relatives. No adverse inference can be drawn against the assessee based on the prevailing system in the society. Where the assessee has furnished sufficient documentary evidence of his father and the brother to justify the income in their hands from the activity of agricultural, no adverse inference can be drawn against the assessee by holding that the amount of cash deposited by the assessee in his bank represents the unexplained cash credit under section 68 of the Act.
(The author is a FCA, LL.M & LL.B and Partner at Tax Connect Advisory Services LLP. The views expressed are personal. The author is The Chairman Indirect Tax Core Group of CII and The Chairman of The Fiscal Affairs Committee of The Bengal Chamber of Commerce. He has Authored more than 15 books on varied aspects of Direct and Indirect Taxation. E-mail - vivek.jalan@taxconnect.co.in)