Direct Tax Vista Your weekly Direct Tax recap Edn. 11 – 21st June 2022 By Vivek Jalan, Partner, Tax Connect Advisory Services LLP

 

 

1. Penny Stocks Case: Taxpayers have to explain that share price rise was genuine

In a judgement with far reaching implications, The Hon’ble Calcutta High Court in the case of PCIT, KOLKATA Vs SWATI BAJAJ [2022-VIL-147-CAL-DT], has upturned the Order of The ITAT Kolkata. It held that the IT Dept was right in “working backwards” and assuming jurisdiction even outside the state, while causing an investigation in penny stocks case, considering its magnitude.

 

The Hon’ble Court has gone on to term the LTCG on penny stocks as a dubious methodology which been adopted for the purpose of availing certain benefits not admissible under law. The same was held not “tax planning” but “tax avoidance” by adopting illegal methods.

 

As mandated in Section 68 of the Act, the onus has been cast on the assess to explain the unreasonable rise in the price of the shares of penny stock companies over a short period of time of little more than one year. It was observed that the assessee does not and cannot dispute the fact that the shares of the companies which they have dealt with were insignificant in value prior to their trading. If such is the situation, it is the assessee who has to establish that the price rise was genuine and consequently they are entitled to claim LTCG on their transaction. Until and unless the initial burden cast upon the assessee is discharged, the onus does not shift to the revenue to prove otherwise - unless and until the assessee discharges such burden of proof, the addition made by the assessing officer cannot be faulted.

 

It is to be seen whether the taxpayers go against this order before the Apex Court. If at all, they would certainly have to go with the answers to questions asked by The Hon’ble High Court.

 

2. TDS u/s 194R from 1st July 2022 on Business Promotion expenses, reimbursements, etc

TDS u/s 194R from 1st July 2022 would require Business Promotion expenses and reimbursements to be restructured by the Businesses and the recipients of such payments would have to consider their liabilities u/s 28(iv). In brief the following are the important clarifications provided in Circular 12 of 2022 dated 16th June 2022-

 

o     The Recipient has to offer the Value of such Benefit/Perquisite for taxation in its ITR under PGBP u/s Section 28(iv) which provides for charging as PGBP the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession – However There is no requirement for deductor to verify the same

 

o     Capital Asset - Thus, the deductor is required to deduct tax under section 194R of the Act in all cases where benefit or perquisite (of whatever nature) is provided.

 

o     Sales discount, cash discount and rebates – No 194R even though they are benefits. When a person gives incentives (other than discount, rebate) in the form of cash or kind such as car, TV, computers, gold coin, mobile phone etc – 194R Applicable

 

o     Buy one get one free – No 194R

 

o     Free Samples – 194R would be applicable

 

o     Reimbursement - Any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession.

Only if the “invoice” is in the name of the service recipient, then there is no 194R

 

o     Dealer Conferences - in a case where dealer/business conference is held with the prime object to educate dealers/customers – No 194R

 

194R applicable incase of conferences –

 

- in the nature of incentives/benefits to select dealers/customers who have achieved particular targets

- Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer/business conference.

- Expenditure incurred for family members accompanying the person attending dealer/business conference

- Expenditure on participants of dealer/business conference for days which are on account of prior stay or overstay beyond the dates of such conference.

 

o     What would be the Valuation for the Deductor is another issue. It would involve disputes incase of both the total value disclosed as well as individual deductees

 

o     No TDS incase provider/recipient of the benefit/perquisite is a non-resident and/or recipient is a Non Resident

 

o     There must exist nexus between the business of the recipient resident & benefit provided to him. B2C benefits will not come under the purview of 194R/ 28(iv)

 

o     In David Dhawan [2005] 2 SOT 311 (Mumbai)/[2005] 92 TTJ 161 (Mumbai), it was held that when the person is travelling for performing the work and his family joins him at that place of temporary relocation, it cannot be regarded as a perquisite. However herein it would be regarded as a benefit/perquisite.

 

o     Benefit/Perquisite has to be provided in Kind - Hon'ble Apex Court in the case of Mahindra & Mahindra Ltd has held that in order to invoke the provisions of section 28(iv) of the Income Tax Act, the benefit which is received has to be in some other form rather than in the shape of money. However as per Circular 12 of 2022, 194R would be applicable even incase the benefit is paid in cash.

 

o     The CBDT has clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R.

 

o     The board has clarified that the valuation of benefit/perquisite shall be based on fair market value of the benefit or perquisite. However, if deductor has purchased the benefit/perquisite before providing it to the recipient. In that case, the purchase price shall be the value for such benefit/perquisite.

Further, if the deductor manufactures such items then the price that it charges to its customers for such items shall be the value for such benefit/perquisite.

 

3. Treatment of Lease Rental (incase of Finance Lease) in Income Tax Vs Companies Act

It is trite law that book entries are not determinative of tax liability. AS-19 provides the accounting treatment to be given to the two types of leases – Finance Lease & Operating Lease. The lease payment would have two components i.e., principal and finance charges. The finance charges have been debited to the Profit & Loss Account of the lessee. The assets under finance lease are capitalized in the Balance Sheet of the lessee as Fixed Asset and depreciation is claimed on the same under the Companies Act. The lease rental payable by the assessee is shown as liabilities. However, in the computation of income, the assessee shall reverse the depreciation and claim gross lease rental as deduction on the ground that Income Tax Act do not differentiate between finance lease as well as operating lease.

 

In the hands of the lessor, the entire 'lease rentals' and not merely the finance charges component thereof shall be taxed as income. The lessor, who is the legal owner of the asset, is entitled to claim depreciation under the provisions of the Income Tax Act. The ownership of the assets is not parted with by the lessor in case of finance lease and lessee merely pays lease rental to the lessor. In such a case, for income tax purposes it would only be the lessor which is entitled to claim depreciation. The lessee would be entitled for deduction of gross lease rental payments.

 

4. Income being attached to an immovable property cannot be the sole reason for assessment under House Property

Running a Business Centre is actually the provision of infrastructure facilities and not merely letting out the property or part thereof. The intention of the assessee is to allow the spaces for commercial use by commercially exploiting the property for the purpose of business and includes services of a receptionist, secretarial services,  security, etc. As per the decision of the Hon’ble Supreme Court confirming the decision of The Hon’ble Calcutta High Court in CIT vs. Shambhu Investments Pvt. Ltd. 249 ITR 47 (Calcutta), Incase the main intention is for letting out the property or any portion thereof the same must be considered as rental income or income from property. In case it is found that the main intention is to exploit the immovable property by way of complex commercial activities in that event it must be held as business income. Relying upon the same, it was held that Business Centre Income shall be taxed under the head ‘Business and Profession’ in the case of WEL INTERTRADE PRIVATE LIMITED Vs ACIT [2022-VIL-739-ITAT-DEL].

 

5. Depreciation on entire value of composite contract of Land & Building allowable

In a case, when the assessee does not have any segregation value of land and building of a premise and it has paid composite price, the entire depreciation claim is allowable under Section 32 of the Act. In the case of NATIONAL HOUSING BANK Vs ACIT [2022-VIL-738-ITAT-DEL]. It was provided that there cannot be an imaginary bifurcation of a composite contract between value paid for land and for building

 

6. Expenses cannot be disallowed for the mere reason that they were made in ‘cash’

Many a times ‘cash expenses’ are booked under the head ‘miscellaneous expenses’. While cash vouchers are available and bills too are available, AOs have a tendency to disallow a part of these expenses on an adhoc basis, as they are not able to find out any specific reason for disallowance. However, the AO has to pass a speaking order with the reason as to why such expenses are not considered allowable as business expenses. The Onus to substantiate that these expenses were incurred only and exclusively for the purpose of business, incase books are audited, does not shift on the assessee. The same was held in the case of M/s MKJ TRADEX LTD Vs DCIT [2022-VIL-740-ITAT-KOL].

 

Nonetheless, it is always advisable to book expenses under the right head rather than club them as ‘miscellaneous expenses/ general expenses’. This would make the task of the AOs simpler and would lead to reduction of litigation.

 

7. Applicability of Transfer Pricing Safe Harbour Rules extended for AY 2022-23

According to safe harbour rules, tax authorities shall accept the transfer price declared by the taxpayer to be at arm’s length, which in turn helps to reduce litigation. The rules are popularly adopted by multinationals in software development, ITeS and KPO industries as they have large transactions between their local and headquartered firms, often leading to transfer pricing issues.
The CBDT has extended the validity of provisions of Rule 10TD(1) & Rule 10(2A) till Assessment Year 2022-23. Rule 10TD(1) and Rule 10TD(2A) prescribe a list of eligible international transactions where transfer price declared by the assessee shall be required to be accepted by the Income-tax Authorities. Sub-rule (3A) to Rule 10TD sets time limit for the application of the provision of sub-rules (1) and (2A).

 

India introduced the first provisions of the rules in 2013, for three years, and revised them in 2017 which were applicable till FY 2019. The operating profit margin was lowered from 30% to 24% for research and development including that of generic pharma drugs, rates were revised for ITeS and BPO to 17-18%, from 20-22% earlier. A three tier structure was provided for KPOs - at 18%, 21% and 24% - where operating profit margin would depend on the employee cost-to-operating expense ratio. 

 

Later the Board has inserted a new sub-rule 3B to the Rule 10TD(3B) to extend the applicability of provisions of sub-rules (1) and (2A) till Assessment Year 2021-22.

The Board has now amended Rule 10TD(3B) to further extend the applicability of Safe Harbour Rules until Assessment Year 2022-23.

 

8. No hard and fast rule can be laid down to indicate what is a reasonable time for completion of assessments

Drawing a clue from Article 113 of the Limitation Act, the residual entry, it would be reasonable to conclude that in assessment cases, action is to be concluded within 3 years. if the statute prescribes shorter period, the doctrine of reasonable time will not be applicable and the timeline under the statute is to be strictly followed.

 

It has been held in CIT & THE DCIT Vs M/s ROCA BATHROOM PRODUCTS PRIVATE LIMITED [2022-VIL-149-MAD-DT] that the provisions of Sections 144C and 153 are not mutually exclusive, but are rather mutually inclusive. The period of limitation prescribed under Section 153 (2A) or 153 (3) is applicable when the matters are remanded back irrespective of whether it is to the AO or TPO or the DRP, the duty is on the AO to pass orders. Even in case of remand, the TPO or the DRP have to follow the time limits as provided under the Act. The entire proceedings including the hearing and directions have to be issued by the DRP within nine months as contemplated under Section 144C (12) of the Income Tax Act. Irrespective of whether the DRP concludes the proceedings and issues directions or not, within nine months, the AO has to pass orders within the stipulated time.

 

9. CBDT Provides Relaxation from TDS U/S 194I On Lease Rentals Paid To Air Craft Leasing Units Located In IFSC

Section 194-I provides that any person, including specified individual and HUF, paying rent to a resident person in respect of plant, machinery, land, building, or furniture shall deduct tax therefrom. The tax shall be deducted if the sum paid or payable during the financial year exceeds Rs. 2,40,000.

 

The Central Board of Direct Taxes (CBDT) has exempted deduction of tax at source under section 194-I on payment of lease rent or supplemental lease rent made to a unit located in the International Financial Services Center (IFSC) for the lease of an aircraft.

 

The exemption is available subject to the fulfillment of certain conditions such as:

 

o     The lessor shall furnish a statement-cum-declaration in form no. 1 to the lessee giving details of previous years relevant to the 10 consecutive assessment years for which the lessor opts for claiming deduction section 80LA.

o     The lessee shall not deduct tax on payment made or credited after the date of receipt of Form no. 1 and furnish the particulars of all the payments made to the lessor on which tax has not been deducted in the TDS statement.

o     The exemption shall be available during the said previous years relevant to the ten consecutive assessment years as declared by the lessor in Form No. 1 for which deduction under section 80LA is being opted. The lessee shall be liable to deduct tax on payment of lease rent for any other year.

 

10. CBDT prescribes ‘other conditions’ to be fulfilled by a specified fund referred to in Sec. 10(4D)

The Central Board of Direct Taxes (CBDT) has notified a new Rule 21AIA prescribing the “other conditions” required to be fulfilled by a specified fund referred to in section 10(4D) of the Income-tax Act. The specified fund is also required to certify that it has fulfilled the conditions and furnish information in respect of units held by residents in the annual statement of exempt income in Form No. 10-IG

 

11. Opportunity to invest in RBI Sovereign Gold Bond Scheme 2022-23

Good Opportunity for resident individuals, Hindu Undivided Families (HUFs), trusts, universities and charitable institutions, to invest in Gold. The first tranche of Sovereign Gold Bond (SGB) for 2022-23 will open for subscription for five days from June 20.  the second tranche (2022-23 Series II) will be available for subscription during August 22-26, 2022. The tenor of the SGB will be for a period of 8 years with an option of premature redemption after 5th year to be exercised on the date on which interest is payable. The maximum limit of subscription is 4 Kg for individuals, 4 Kg for HUFs and 20 Kg for trusts and similar entities per fiscal year. the price of SGB will be fixed in rupees on the basis of a simple average of the closing price of gold of 999 purity, published by the IBJA for the last 3 working days of the week preceding the subscription period.  The issue price of the SGBs will be less by Rs 50 per gram for the investors who subscribe online and pay through digital mode. The investors will be compensated at a fixed rate of 2.5 per cent per annum payable semi-annually on the nominal value. The SGBs are sold through banks, Stock Holding Corporation of India Limited (SHCIL), Clearing Corporation of India Limited (CCIL), post offices and the two stock exchanges (NSE and BSE)

 

The capital gains tax arising on redemption of SGB to an individual is exempted. The indexation benefits will be provided to long term capital gains arising to any person on transfer of the SGB.

 

(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)