CA C. Neelakantan Ashok Leyland Limited

Transcription

1 CA C. Neelakantan Ashok Leyland Limited May 16, 2014 Work shop on Direct Taxes 1

2 Sec 14A read with Rule 8D Sec 32 Restriction of depreciation Sec 35 Non-eligible Scientific Research Exp. Sec 37 & 43A- Foreign exchange differences Spend on Corporate Social Responsibility Sec 40 Amounts not deductible Sec 40A - Expenses not deductible Sec 43B - Disallowances May 16, 2014 Work shop on Direct Taxes 2

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4 Key words In relation to (casual relationship enough) Income not includible in Total income i.e. Sec. 10 exemptions Procedural irks Re-opening Lower risk of invoking 271(1)(c) May 16, 2014 Work shop on Direct Taxes 4

5 Rule 8D (formula based) is mostly adopted by AOs Three limbs of Rule 8D: (i) Direct expenditure (ii) Proportionate expenditure = Interest expense x Average Investments Average Assets (iii) Operating expenditure = 0.5% of Average Investments Rule 8D is applicable prospectively Godrej and Boyce Mfg Co. vs.dcit -328 ITR 81 Bom.HC Rule 8D can be adopted only when the AO proves that the disallowance made by Assessee is not satisfactory - Jasoda Devi Charitable Trust Vs. CIT (2010) 4 ITR 457 (Jaipur)(Trib.) May 16, 2014 Work shop on Direct Taxes 5

6 Disallowance u/s. 14A by Assessee to be based on scientific methodology with appropriate documentation Interest Expenditure attributable as per 2 nd limb If the enduse of Borrowings is for specific taxable purpose, then 2 nd limb will not be applicable - ACIT vs. Best and Crompton Engineering Limited - ITA No.1603/Mds/2012 dt ITAT Chennai, Raj Shipping Agencies Ltd. Vs. ACIT [2013] 146 ITD 277 Considering Average Value of Investments other than Investments yielding taxable income i.e. Total Investments less Investments in foreign subsidiaries (as the dividend from the same is taxable u/s. 115BBD), Bonds (interest is taxable) Total Assets Old Sch.VI: Total as per Balance Sheet (+) Current Liabilities ( ) Dr. balance in P & L a/c (-) Reval. Res - Rev. Sch.VI: Total of Balance sheet (-) Reval. Res May 16, 2014 Work shop on Direct Taxes 6

7 REI Agro Ltd vs. DCIT - Kolkata ITAT- TS 271-ITAT Investments which actually earned exempt income during the year has to be considered for 14A disallowance r.w. Rule 8D however CBDT Circular no.5/2014 dt clarified that the words includible is used in S.14A and hence all the investments to be considered despite no actual earning of exempt income during the year. Rule 8D 2 nd limb not applicable for Investment in Subsidiary/Strategic reasons o For: JM financial Limited vs. ACIT Mum. ITAT ITA o No.4521/Mum/ and Holcim (India) Pvt Ltd Vs DCIT. ITA Nos.5123 & 5124/Del/2012 Against: Maxopp Investments Limited [TS-668-HC-2011] Del.HC May 16, 2014 Work shop on Direct Taxes 7

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9 Controversy over who is the owner for the claim of depreciation especially in Finance lease New Direct tax code shifts it from Lessor to Lessee Additional depreciation 20% Applicable only for new plant and machinery Not installed in office premises, residential house, Guest house Restricted to 10% for assets used < 180 days No additional depreciation for assets having 100% depreciation (Pollution control) rates (if used < 180 days) Sec 38 Where any building, machinery, plant or furniture is not exclusively used for the business or profession, AO can restrict the expenditure to a fair proportion May 16, 2014 Work shop on Direct Taxes 9

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11 Expenditure to be on research What is research is covered in Section 43(4) Does not include any expenditure incurred in the acquisition of rights in, or arising out of scientific research. Expenditure to be incurred in approved in-house R & D facilities Approval in Form 3M should has to be obtained, else there can be no allowance under this section. There is controversy on the allowance of expenditure for the whole year, if the approval is obtained mid-year R & D activities carried outside India, even if directed and controlled from in-house R & D facility do not qualify for claim May 16, 2014 Work shop on Direct Taxes 11

12 Expenditure to be directly identifiable to the approved R & D center Utilities from a common source to be separately metered Expenditure on manpower of other departments based on time spent on R & D is not allowed Expenditure of a general nature, overheads of common nature is not allowed Money / Gifts / Subsidy / Grants / Donations etc. received should be credited to the expenditure and only net expenditure is to be claimed May 16, 2014 Work shop on Direct Taxes 12

13 Specific exclusions as per DSIR guidelines: Expenditure on outsourced R&D activities Expenditure purely relating market research, sales promotion, quality control, commercial production, style changes Lease rent paid for research labs Foreign patent filing expenditure Foreign consultancy expenditure Building maintenance, municipal taxes, rental charges paid Interest components on loans for R&D Clinical trial activities carried out outside approved facilities Contract research expenses Payments made to Board of directors/ part-time employees. May 16, 2014 Work shop on Direct Taxes 13

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15 Expenses wholly and exclusively for business dominance of purpose Not a Capital expenditure Not in the nature of expenditure for offence or prohibited by law Current/Emerging Issues: Foreign Exchange differences CSR activities May 16, 2014 Work shop on Direct Taxes 15

16 Fixed assets - Imported Realised Unrealised - Supplier liability Covered by 43A Non taxable/not claimable - Foreign currency loans Covered by 43A Non taxable/not claimable Fixed assets Domestic - Foreign currency loans Non taxable/not claimable (other than covered by 43A) Fixed assets relating to R & D Covered by 35 Fixed assets relating to R & D Covered by 35(2AB) Covered by 43A Non taxable/not claimable Non taxable/not claimable Taxable / Claimable Taxable / Claimable May 16, 2014 Work shop on Direct Taxes 16

17 Realised Investments On sale of Investments Consideration to be adjusted Loans given to foreign companies Unrealised Not applicable Non taxable/not claimable Non taxable/not claimable Foreign currency loans used for the purpose of giving loans Non taxable/not claimable Non taxable/not claimable Foreign currency borrowings as part of circulating capital (like Packing credit) Taxable / Claimable Taxable / Claimable Cash balances Non taxable/not claimable Non taxable/not claimable May 16, 2014 Work shop on Direct Taxes 17

18 Trade transactions reckoned in the P&L account Trade transactions reckoned in Hedge reserve Forward contracts Hedging transactions Realised Taxable / Claimable Taxable / Claimable Will follow the treatment of the underlying Unrealised Taxable / Claimable Taxable / Claimable Will follow the treatment of the underlying Other derivative contracts Taxable / Claimable Taxable / Claimable May 16, 2014 Work shop on Direct Taxes 18

19 Fluctuation gain on capital account not taxable - Sutlej Cotton Mills Ltd. Vs. CIT [1979] 116 ITR 1 SC, E.I.D. Parry Ltd. Vs. CIT [1988] 174 ITR 11 (Mad.) & Triveni Engg. Works Ltd. Vs. CIT [1985] 156 ITR 202 Delhi HC Treatment of Exchange gain on revenue domain as per Accounting Standards (both realised and unrealised) blessed by SC- CIT Vs. Woodward Governor India (P) Ltd (2009) 312 ITR 254 & DCIT v. Bank of Bahrain and Kuwait,(ITA Nos & 1883/Mum./2004 May 16, 2014 Work shop on Direct Taxes 19

20 CSR Mandatory as per Companies Act 2013 for companies with specified annual turnover/profits 2% of Profits Capital expenditure such as school or a hospital building may not be allowed u/s 37 If the nature of CSR expenditure is such that no capital asset of taxpayer s ownership is created (such as expenditure incurred on distribution of clothes or medicines, expenditure on free health camps, etc.) this condition will not be a hurdle Installation of Traffic signals, where there is benefit to employees and general public has been allowed CIT vs. Infosys Technologies Limited (2014) 43.taxmann.com 251 Kar.HC Available deductions for CSR: o Research 35 (1)(ii) (175%); (iia), (iii) (125%) o Approved Project - 35AC o Rural development 35CCA o Conservation projects 35CCB o Agriculture 35CCC (150%) o Skill development 35CCD (150%) o 80G - (mostly 50%, subject to GTI) May 16, 2014 Work shop on Direct Taxes 20

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22 TDS liability applicable on payment or credit to account, which ever is earlier Controversy regarding payable has been put to rest with Circular (10/DV/2013) which has clarified that payable includes paid during the year. Amount of expenditure will be deductible to the extent, TDS has been deducted and paid (even, if it is proportion in case of short deduction) If Form 26A certified by an accountant can be obtained from a resident payee that he has discharged his tax liability, there will not be a disallowance May 16, 2014 Work shop on Direct Taxes 22

23 Other amount disallowed: Fringe benefit tax Any Tax levy on profits and gains of any business Wealth tax Does not include any tax chargeable on assets of the business or profession (Wealth tax is applicable for Land / Building / Motor cars / Jeeps) Any Tax borne by Employer on employee perks May 16, 2014 Work shop on Direct Taxes 23

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25 Transactions with persons covered by 40A (2)(b) Now covered by SDT Filings done in Form 3CEB Onus has now shifted to the assessee Words ALP has been substituted for excessive or unreasonable Payment in excess of Rs.20,000 other than by account payee cheque / draft Exceptions : Rule 6 DD Unapproved gratuity fund Setting up / contribution to fund not covered by Sec 36 or if required by statute May 16, 2014 Work shop on Direct Taxes 25

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27 Deductible only on payment basis: Tax, duty, cess or fee Employer s contribution to PF, SAF, Gratuity funds or other employee welfare fund Employee bonus or commission Interest on loan Financial institution Scheduled bank Leave encashment May 16, 2014 Work shop on Direct Taxes 27

28 Does not include constructive payments like Transfer of liability as part of undertaking Conversion of interest due as Loan Where there is weighted deduction (like employee related claim u/s 35(2AB), the disallowance should be for the weighted portion also Disputed taxes Safer to claim on payment basis, even though they might not have been debited to P & L a/c Profits u/s 80IA, 80IC should take into account 43B disallowances which arriving at Profits May 16, 2014 Work shop on Direct Taxes 28

29 Thank You May 16, 2014 Work shop on Direct Taxes 29