Tax Issues -NBFC. Presented by CA Mahazaver Patel for

Transcription

1 Tax Issues -NBFC Presented by CA Mahazaver Patel for 1

2 KEY REVENUE ISSUES PROFITON SALE OF SECURITIES DIVIDEND PREMIUM RECEIVED INTEREST ON LOANS & DEPOSITS UPFRONT FEES / UNDERWRITING COMMISSION 2

3 KEY EXPENDITURE ISSUES PRELIMINARY EXPENSES U/S 35D DEPRECIATION ON LEASED ASSETS BAD DEBTS U/S 36(i)(vii) INVESTMENTS WRITTEN OFF 3

4 DIVIDEND RECEIVED 4

5 DIVIDEND / TAXFREE INVESTMENTS IS 14A DISALLOWANCE MADE? YES No WORKING u / r 8D WHY NO DISALLOWANCE? 5

6 KEY ISSUES ON RECEIPT OF DIVIDEND AND INCOME ON TAX-FREE INVESTMENTS Dividend received is exempt u/s 10(34) on shares and u/s 10(35) on units. Disallowance u/s 14A w.r.t. Rule 8D Calculation u/r 8D (i) Direct Expense xxx (ii) Interest x Average Tax-free Investments xxx Average Assets (iii) 0.5% of Average Tax-free Investments xxx TOTAL (i + ii + iii) xxx 6

7 KEY JUDGEMENTS ON S.14A The words in relation to in S 14A encompasses direct and indirect expense which has any relation to exempt income. - ITO v Daga Capital Management Pvt. Ltd 117 ITD 169 (SB) Disallowance u/s 14A is applicable even if there is no tax-free income -Cheminvest Ltd v ITO 124 TTJ 577 (Del)(SB) 7

8 KEY JUDGEMENTS ON S.14A Even under Rule 8D of S. 14A, disallowance can be made only if there is actual nexus between tax-free income and expenditure -CIT v Hero Cycles 323 ITR 158 (P&H) Disallowance u/s 14A is applicable only if shares are held as investments & not stock-in-trade. -CIT v Leena Ramchandran ITA No 1784 of 2009 (Kerela High Court) dt

9 KEY JUDGEMENTS ON S.14A Rule 8D r.w.s. 14A (2), to be applied if assessee s method is not satisfactory. Rule 8D to be applied from A Y For earlier years disallowance to be made on a reasonable basis. -Godrej & Boyce Mfg Co. Ltd 210 ITR 81 (Mum) No disallowance u/s 14A is to be made for interest on borrowed capital on the basis that assessee should have used own funds to repay loans & not to invest in shares - Godrej Agrovet Ltd v ACIT ITA 1629/Mum/

10 KEY JUDGEMENTS ON S.14A For S. 14A disallowance, even under rule 8D, onus is on the AO to prove nexus between tax-free income earned & expenditure incurred. -DCIT v Jindal Photo Ltd ITA No. 4539/Del/2009 -DCIT v Maharashtra Seamless Ltd ITA 4063 (Del) CIT v K Raheja Corporation Pvt. Ltd ITA 1260 of Yatish Trading Co P Ltd v ACIT ITD 237 (Mum) 10

11 KEY JUDGEMENTS ON S.14A S. 14A disallowance has to be made on the basis of nexus between expenditure & income & not on adhoc basis. -DCIT v ING Investment Management (India) Private Limited ITA Nos 1239 & 5203/Mum/2005 and 1435 & 346/Mum/ Minda Investments v DCIT ITA No.4046/Del/2009 No Disallowance u/s 14A if assessee has no tax-free income. -Siva Industries & Holdings Ltd v ACIT 46 SOT

12 PROFIT ON SECURITIES 12

13 SALE OF SECURITIES BUSINESS INCOME CAPITAL GAINS STOCK-IN-TRADE v INVESTMENT 13

14 KEY JUDGEMENTS ON CAPITAL GAINS v BUSINESS INCOME Circular No 4 / 2007 dated The Income Tax Act, 1961 makes a distinction between a capital asset and a trading asset - Authorized by Memorandum of Association - Substantial Nature of Transaction, quantum of purchase & sale and ratio between purchase & sale - Motive for earning profits View: -The assessee can maintain portfolios as investments & as stock-in-trade. -This circular to act as a guide to the AO to decide whether the transaction is business income or capital gains. 14

15 KEY JUDGEMENTS ON CAPITAL GAINS v BUSINESS INCOME Test laid down to determine income from shares is business income or capital gains - Sadhana Nabera v ACIT ITA No. 2586/Mum/2009 -Management Structure & Systems Pvt. Ltd ITA No. 6966/Mum/2007 Gains arising from PMS transactions are Capital Gains & not Business. - ITO v Radha Birju Patel 46 SOT 23 (Mum) -ARA Trading & Investments Pvt. Ltd v DCIT ITA 499/PN/

16 KEY JUDGEMENTS ON CAPITAL GAINS v BUSINESS INCOME Although the main business of the assessee is dealing in shares, shares can also be held as investments -CIT v PNB Finance and Industries 9 Taxmaan.com 297 (Del) Shares activity treated as capital gains in earlier years cannot be treated as business in subsequent years if facts are the same. -CIT v Gopal Purohit 188 Taxmaan 140 (Bom) -CIT v Girish Mohan Ganeriwala 135 Taxmaan 233 (P&H) 16

17 KEY JUDGEMENTS ON CAPITAL GAINS v BUSINESS INCOME Large Volume of Purchase & Sale of Shares does not mean business activity -DCIT v SMK Shares & Stock Broking ITA No 799/MUM/2009 -Janak S Rangwala v ACIT 11 SOT 627 -Bombay Gymkhana Ltd v ITO 27 SOT 58 (MUM) (URO) -Ramesh Babu Rao v ACIT ITA 3719/Mum/2009 Multiple orders for purchase / sale of shares may constitute one transactions -Nehal V Shah v ACIT ITA No 2733/Mum/

18 KEY JUDGEMENTS ON CAPITAL GAINS v BUSINESS INCOME Short Period of Holding shares does not mean business activity -ACIT v Vinod K Nevatia ITA 6556/Mum/2009 Even Shares held for a period of less than 30 days is Short Term Capital Gain & not Business -Hitesh Satishchandra Doshi v JCIT 46 SOT 336 (Mum) 18

19 DEPRECIATION 19

20 DEPRECIATION ON LEASED ASSETS If assessee is in the business of leasing of assets, the assets leased are said to be used for the purpose of assessee s business and hence depreciation is allowable. Also income from hiring charges is treated as business income. -CIT v Shaan Finance Limited 231 ITR

21 PRELIMINARY EXPENSES 21

22 KEY ISSUES Expenses incurred on Public Issue of shares is not applicable u/s 35D of the Income Tax Act, Bombay Burmah Trading Corp v CIT 145 ITR 793 -Birla Global Finance Ltd v ACIT 13 SOT 600 (Mum) -CIT v Glaxo Ltd 189 ITR 59 22

23 BAD DEBTS 23

24 KEY ISSUES AND RELEVANT JUDGEMENTS Diminution in the value of Investments allowable as revenue loss on investments held as stock-in-trade -United Commercial Bank 249 ITR 355 (SC) -UCO Bank 200 ITR 68 (Cal) -Bank of Baroda 262 ITR 334 (Bom) -Nedungadi Bank 200 ITR 68 (Cal) -Corporation Bank 174 ITR 616 (Kar) 24

25 KEY ISSUES AND RELEVANT JUDGEMENTS Loans & Advances written off allowable u/s 36(1)(vii) based on facts -CIT v Mysore Sugar Co. Ltd 46 ITR 649 (SC) -I B M World Trade Corporation v CIT 48 Taxmaan 11 (Bom) Decision of the assessee to treat bad-debts in the books should be a business or commercial decision -DIT v Oman International Bank 100 ITD 285 (Mum). This is also accepted by the Hon. Bombay High Court 25

26 KEY ISSUES AND RELEVANT JUDGEMENTS As per the amended provisions of section 36(1)(vii), the assessee is not required to prove that the debt is bad. Merely Bad-debts written off in the books are sufficient -TRF Ltd v CIT 190 Taxmaan 391 (SC) -CIT v Star Chemicals 313 ITR 126 (Bom) -C IT v Girish Bhagwan Prasad 256 ITR 772 (Guj) 26

27 KEY ISSUES AND RELEVANT JUDGEMENTS The amended provision of section 36(i)(vii) is to enable the assessee to get deduction and at the same time the AO is authorized to see whether the provisions are not flouted. - -CIT v Kohli Brothers Color Lab (Allahabad HC) For Section 36(i)(vii), write-off of individual debtors is not necessary -Vijaya Bank v CIT (SC) 27

28 OTHER ISSUES 28

29 KEY ISSUES AND RELEVANT JUDGEMENTS Upfront Fees / Underwriting commission received towards subscription in equity shares is not to be treated as income but to be reduced from the value of investments - UP State Industrial Development Corporation v CIT 130 ITR 835 Claiming of provision of Lease Equalization Charges in computation of book profits not allowable as per section115ja(2)(b) - GE Capital Transportation Financial Services Ltd v ACIT 29

30 KEY ISSUES AND RELEVANT JUDGEMENTS Redemption Premium can be claimed over the period of the debentures, promissory notes etc. -Madras Industrial Investment Corporation Ltd v CIT 225 ITR 802 -Kedarnath Jute Manufacturing Co Ltd v CIT 82 ITR 363 Broken period Interest is in the nature of capital and hence not allowable as deduction. The same is allowable only if investments are treated as stock-intrade -American Express International Banking Corporation 258 ITR 601 (Bom) -Union Bank of India 268 ITR

31 KEY ISSUES AND RELEVANT JUDGEMENTS Interest on Non Performing Assets to be accounted on receipt basis whereas interest on performing assets on accrual basis. -UCO Bank v CIT 237 ITR 889 (SC) -Cit v India Equipment Leasing 239 ITR 350 (Mad) -CIT v Elgi Finance 293 ITR 357 (Mad) -ANZ Grindlays Bank 250 ITR 125 (Cal) -American Express International Banking Corp 258 ITR 601 (Bom) 31

32 TDS 32

33 KEY ISSUES AND RELEVANT JUDGEMENTS Exemption denied to NBFC AFCs from Tax Requirements u/s 194A (3) (iii) of the Income Tax Act Gross Rentals subjected to TDS u/s 194 I and not the interest portion alone Basic Exemption limit of Rs10,000/-available to Banks but not to NBFCs 33

34 VAT / CST 34

35 KEY ISSUES ON VAT / CST Hire Purchase and Lease transactions -treated as sale NBFC to obtain the relevant registrations To comply with the respective laws 35

36 SERVICE TAX 36

37 KEY ISSUES ON SERVICE TAX Hire Purchase Income & Lease Rentals are subject to Service tax which has been objected by the industry. -Kerela Non-Banking Finance Companies Welfare Association (2009 TMI ) -Madras Hire Purchase Association (16 STR 3 MAD) -The South India Hire Purchase Association and Equipment leasing & Association of India The Special Leave Petition filed with the Supreme Court was dismissed. 37

38 THANK YOU CA Mahazaver Patel, Chartered Accountant Disclaimer: The views expressed herein in this presentation summary are the personal views ofthespeakerandintendedforgeneralguidanceonlyandshouldnotbeconstruedtobea professional advice or sufficient for making any decisions. The presenter does not accept any responsibility for loss arising to any person acting or refraining from action as a result of any material in this presentation summary. On any specific matter, reference should be made to the appropriate advisor. 38