THE SUPREME COURT has upheld the Income-Tax Appellate Tribunal (ITAT) order allowing enhanced depreciation on a notional increase in the cost of imported assets on account of forex rate fluctuation. The court’s verdict came in response to an appeal filed by Honda Siel Power Products which was into manufacture of portable gensets.
Honda returned nil income for the assessment year 1991-92. During the previous year, it had availed of a term loan in foreign exchange for import of machinery. Owing to the depreciation of the rupee (INR), Honda’s loan rose by INR 7,10,910. Honda correspondingly enhanced the written-down value of the machinery in terms of Sec 43A of the Income Tax Act, 1961. It helped the company claim a higher level of depreciation.
The higher depreciation that Honda claimed was rejected by the Assessing Officer (AO). The AO contended that such revision in the actual cost was not admissible as Sec 43A referred to adjustment of the actual cost of machinery on account of increase or decrease in liability of unpaid loans utilised for the purchase of machinery. The AO was ‘stretching it’ when he used the phrase ‘unpaid loans’. Sec 43A no doubt refers to ‘loan’ (in fact it uses the word ‘borrow’) but nowhere does it qualify the loan as paid or unpaid. In the circumstances, it was unwarranted on the part of the AO to talk of the status of the loan (i.e., whether it was paid or unpaid).
Honda appealed to the Commissioner of Income Tax (Appeals) or CIT (A), who allowed the appeal. The Income Tax department then moved the ITAT which said the CIT (A) had erred in allowing the enhanced depreciation since under Sec 43A, actual payment was a condition precedent for availing of the benefit. ITAT maintained that if actual payment was not made after fluctuation, the value of the asset could not be increased because of the fluctuation-induced change. In other words, like the AO, the ITAT also talked of the status of the loan (i.e., whether it was paid or unpaid, as of a given date). But on a rectification application filed by the assessee, the tribunal allowed the enhanced depreciation on the notional increase in the cost of imported machinery on account of forex fluctuation.
The department filed an appeal in the Delhi High Court which set aside the Tribunal’s revised order. Honda appealed to the Supreme Court against the High Court verdict. The Supreme Court bench set aside the High Court verdict and restored the order passed by ITAT allowing the rectification application filed by the assessee. The bench further said, “When prejudice results from an order attributable to the Tribunal’s mistake, error or omissions, then it is the duty of the Tribunal to set it right”.
The point here is, although the buck fortunately stopped at the Supreme Court, for 17 long years the Income Tax department as well as Honda Siel have wasted their precious time, energy and money over what is essentially a non-issue.
Often, the Union Finance Minister talks of the ever-rising pile of income tax-related disputes pending resolution. At the same time, his officers give the impression that they would like the pile to rise further. Do these officers act in this manner out of ignorance? Or do they want to play safe and hence err on the side of caution? If any or both of these reasons are true, then it is really unfortunate.
It is not enough if our GDP has crossed 1 trillion USD. It is not enough if our market capitalisation figure has crossed 1.5 trillion USD. Simultaneously in areas like mark regulation, tax administration, improvements are to be made. We are on our way to becoming a global economic power. We cannot afford to waste our precious time, energy and money in trivial things like the one I have cited in the foregoing paragraphs. The intent of the legislation is mostly ignored, the spirit of the law is mostly ignored and the letter of the law is mostly adhered to by our officers. They should remind themselves of the dictum fiat justitia ruat et coelum (justice should be done even if the heaven falls). The cause of justice should not be subservient to the rules of procedure
Our officers would do well to remember that in advanced economies even transfer pricing mechanisms have become business-friendly. They have put in place an advance pricing arrangement or APA whereby the tax administration and the assessee define in advance the method of computing transfer pricing for inter-firm transactions. Dispute resolution has thus become easier in the said economies.
But given the mindset of our officers which is prone to complicate even minor tax-related issues, I am not sure we can rise anywhere near the level of the said economies at least in these matters. This being the state of affairs, it is overambitious on the part of our Finance Minister to believe that he can oblige individuals and companies to pay disgorgement. Wishful thinking indeed!
NEW DELHI: The Supreme Court said on Tuesday professionals cannot claim depreciation under Section 32 of the Income Tax Act. The Section is applicable to an assessee carrying on “business” and not to a professional, the apex court said, dismissing an appeal of a chartered accountants’ firm which had sought deduction under this provision.
The appellant, GK Choksi & Company, an Ahmedabad-based chartered accountants firm, had claimed depreciation for the assessment year 1984-85. During the year, the appellant constructed a residential building for its low-paid employees and claimed initial depreciation of 40% under Section 32(1)(iv) of the Act, amounting to Rs 43,505, on the actual cost of the building that stood at Rs 1,08,757.
The I-T department, on January 15, 1985, rejected the claim on the ground that the said provision was applicable to an assessee carrying on “business” and it was not available to a professional. 3
On the plea of the assessee, the commissioner of income tax (appeals) reversed the order of the income tax officer dealing with the case. The revenue department then filed an appeal before the Income Tax Appellate Tribunal which overturned CIT (A) order and restored the order passed by the ITO.
The matter then came to Gujarat high court which upheld the tribunal’s order. The assessee then appealed at the apex court.
An SC bench comprising Justices Ashok Bhan, HS Bedi and VS Sirpurkar said: “The word ‘business’ occurring in clause (iv) of Section 32(1), by no stretch of imagination, can be said to include ‘profession’ as well. There is nothing in Section 32(1)(iv) which envisages the scope of word ‘business’ to include in it ‘profession’ as well.”
Interest rates have been on the rise for almost three years. While the interest rates were on a downslide during 2001-03, many individuals made investments in real estate with the twin objective of owning house property and getting some tax rebates. Today, those investments may seem like an albatross. Over the last three years, interest rates have increased by around 500 basis points, leading to a near 50% rise in EMIs. However, few know that you can avail of the tax concessions, even if your house property is lying vacant. If you have taken a home loan, you are entitled to two deductions - deduction of interest and deduction of principal. You can claim a deduction of the principal sum and stamp duty, registration fee and other specified expenses incurred for the purpose of the house property under Section 80 C (up to a maximum of Rs 1 lakh; inclusive of other tax-saving investments such as PPF and life insurance premia) starting from the financial year in which the house property is purchased or constructed. This concession is applicable only in the case of a self-occupied (or deemed to be self-occupied) property. Similarly, the borrower can also claim a deduction of the interest due on the housing loan under Section 24. Interest deduction on the housing loan is allowed to the extent of Rs 1.5 lakh in case the house was acquired or constructed after April 1, 1999. If the house was acquired or constructed before that date, a deduction of up to Rs 30,000 is permitted. Often, individuals move cities or stay in a different locality (within the same city) for professional reasons and leave their house property vacant. Let’s illustrate this with the example of Sanjay Verma, who bought a house in Mumbai in 2002 and had to shift to Delhi due to his job. If the flat in Mumbai is the only flat he owns, he can avail of the tax concessions (under Section 80-C and Section 24) even if this flat is lying vacant and he is paying rent for the house in Delhi. As per the rules, if an individual buys a house property for self-occupation but cannot occupy it due to employment, and the property is lying vacant, its ‘annual value’ in taken as nil. The ‘annual value’ is the value after deduction of municipal tax, if any, paid by the owner. The annual value or ‘notional rent’ is determined in four ways (a) actual rent received; (b) municipal value (determined by the municipal authorities for levying taxes on house property); (c) fair rent (the rent a similar property can fetch in the same or similar locality); and (d) standard rent, that is fixed under the Rent Control Act. In this scenario, Verma can avail of tax concessions on the interest paid on his housing loan. In fact, he can derive twin benefits in case he is paying rent for his house in Delhi and gets an HRA from his employer. This way, he can reduce his taxable income substantially. What happens if Verma decides to rent out his flat in Mumbai sometime in the middle of this financial year? In this case, he can be still eligible for tax concessions for the period during which his Mumbai flat was lying vacant. Tax concessions can also be availed of in case of more than one vacant house property. Let’s take the case of Verma’s colleague, Alok Jain, who has two vacant house properties - one in Mumbai, another in Bangalore - and he is living in Delhi for reasons of employment. In the case of two vacant house properties, a notional rent (or annual value) is applicable to one property. In this case, Jain can treat any one house as meant for self-occupation. If Jain declares the Mumbai flat as the one meant for self-occupation, the Bangalore flat is deemed to be let out. On the Mumbai flat that is vacant, the same concessions are applicable as the one applicable to Verma. Let’s assume the annual value of Jain’s Bangalore flat is Rs 3.6 lakh. He can deduct a third of this value (Rs 1.2 lakh) as expenditure towards repairs and maintenance. After that, Jain can set off interest paid on this house property against the notional rent. Let’s assume Jain pays an interest of Rs 90,000 on the loan for his Bangalore house. The net notional income from his Bangalore flat comes down to Rs 1.5 lakh, on which Jain is liable to pay tax. If Jain falls in the highest income bracket, the income tax he is liable to pay for the notional income from his Bangalore flat comes to around Rs 50,985 (@33.99%). He has to pay no tax for his flat in Mumbai.
In a tacit acknowledgment that it is virtually impossible to stamp out black money from real estate deals, income tax officials are in favour of a new levy on such transactions.
The suggestion is to introduce a “capital transaction tax” based on the “circle rate” of the state in which the deal is registered.
The reason for the move, which may be part of next year’s tax proposals in the Budget, is to ensure that the exchequer gets some revenues from the real estate boom.
“The tax could be levied at the rate of one per cent on the declared value of the transaction either on the seller or the buyer. Property values are skyrocketing in the country and we know that there is massive under-reporting of actual transaction value,” said a senior government official.
“Buyers and sellers under-value property transactions to avoid paying high stamp duty and income tax, but they pay the brokers a fee, say, 1 per cent, on the entire value of the deal. The capital transaction tax can be levied at a very marginal rate, with the base being the existing circle rate in the local area,” the official added.
Circle rates are area-based minimum rates applicable for registration of properties and vary from state to state. For instance, Delhi has been divided into eight circles — graded A to H — and the circle rates vary from Rs 6,000 to Rs 43,060 per square metre.
Typically, the cash-to-cheque or draft payment ratio (also called black and white in real estate circles) is 60:40.
In housing deals that are financed through institutional loans, the incidence of black money is lower. However, land deals, for which finance is harder to come by, tend to have a higher black money component.
It is such transactions on which income tax officials are focused. All real estate transactions of Rs 30 lakh and above have to be reported to the tax authorities by the registrars of properties.
This is a mandatory commitment as part of the Annual Information Return of seven different high-value financial transactions required to be furnished under section 285BA of the Income-Tax Act, 1961, by specified individuals and agencies.
In 2006-07, the number of real estate deals worth Rs 30 lakh and above went up by 40 per cent to nearly 108,000 across the country
Rising compliance, buoyant collections may prompt this move
In a move that could spread cheer among over 30 million individual taxpayers in the country, senior income tax officials are in favour of raising the existing exemption limit by Rs 40,000 to Rs 1,50,000 or even higher in the coming Budget.
The tax proposals for the annual Budget are finalised only in February, but income tax officials said raising the exemption limit is possible given rising tax compliance levels and a significant upsurge in direct tax collections on the back of a booming economy and better administration.
“There is scope to raise the exemption limit. The government can raise the first income tax slab to Rs 1,50,001-Rs 2,00,000 per year”, he said.
The other two slabs may also be tweaked.
Finance Minister P Chidambaram had raised the exemption limit on personal income by Rs 10,000 to Rs 1,10,000 in Budget 2006-07. However, officials said the move translated into a tax saving of only Rs 1,000 for an individual, which is minor in today’s context of high incomes and prices.
If implemented, the increased exemption slab will save a taxpayer up to Rs 9,000 in taxes for income up to Rs 2,00,000 per year.
If income up to Rs 1,50,001 is exempted and tax levied at 10 per cent, the tax incidence will come down to Rs 5,000, a saving of over 64 per cent.
“An increase in the exemption limit by Rs 40,000 will be a positive step, especially taking into account the way inflation has been increasing over the last several years,” said Gaurav Taneja, partner, Ernst & Young.
Direct tax collections are expected to increase by 40 per cent in 2007-08 to over Rs 3,22,000 crore, the second year of such growth in a row.
The Income Tax Department is planning to extend the Refund Banker Scheme to the entire country as a move aimed at expediting refund of excess tax. The scheme, launched in Delhi and Patna in March this year, was later extended to Kolkata, Chennai, Bangalore and Mumbai.“It will now be extended to the entire country for the non-corporate category of taxpayers. This will facilitate quick and correct issue of refunds,” an income tax official said.Taxpayers are advised to furnish their bank details and electronic clearing system number in their tax returns, so that their refunds can be credited to bank accounts electronically, the official added. “With the Refund Banker scheme in place all over the country shortly, the Income Tax Department envisages no difficulty in processing refund cases,” the official said.The Income Tax Department has issued over 30 lakh refunds amounting to Rs 18,448 crore in the first seven months of 2007-08. Refund payouts in the non-corporate personal income tax category were up 47.16 per cent at Rs 6,135 crore against Rs 4,169 crore as compared to the first seven months of the last fiscal.Refunds of over Rs 14,000 crore pertaining to large corporate cases have also been processed. Out of these, refunds of over Rs 5,400 crore have been issued. The remaining refunds will also be issued by November 30, 2007.
Industry body recommends fiscal bundle to encourage investment
Monday, November 26, 2007
A leading industry body has recommended an eight-point financial package to encourage investments flowing in and out of the country. According to Federation of Indian Chambers of Commerce and Industry (Ficci), the Indian economy is likely to have a foreign trade turnover of over $350 billion (Rs.13.9 trillion) and foreign investment inflows of $30 billion (Rs.1.2 trillion). Incomes earned by overseas subsidiaries of Indian companies should be exempted from all taxes to encourage them to repatriate their earnings into India, the industry body recommended. Currently, a person is eligible for tax credit paid outside India with respect to doubly taxed income. This is equivalent to the tax at Indian rates or rates of the said country, whichever is lower. Ficci has recommended consolidating such tax liability. In cases when tax paid to the foreign country on income from outside sources is more than what it would be payable in India, the assessed should be eligible for tax credit deduction in respect of the excess part of the tax liability as well, like other countries. Ficci further suggested that the dividend distribution tax be brought under the Double Taxation Avoidance Agreement (DTAA) umbrella. This would enable overseas holding companies with Indian subsidiaries to offset distribution taxes paid in India from tax payable by them in their respective countries. The body has also urged the government to follow the example of other countries such as the Netherlands, Singapore, Luxembourg, Ireland, Spain and Austria, who have redesigned their taxation laws to attract outbound investments. The current provisions require that the taxpayer take arithmetic means of prices. This, Ficci says, should be modified to use other statistical methods such as median of prices. It also suggested measures to ensure that fringe benefit tax on employee stock option scheme is eligible for tax credits under the DTAA. FICCI has also urged proper and timely implementation of an efficient goods and services tax regime that would eliminate distortions and lower taxpayers' burden.
BS Reporters / New Delhi November 26, 2007 Income tax exemptions available to charitable trusts occupied in commercial activity may be withdrawn next year. The move may be part of Budget 2008-09, a senior government official told Business Standard.
Some other tax exemptions available to companies may also be pruned or altered, the official said.
Though tax proposals for the Budget are finalised only in February, income tax officials are examining how various exemptions could be phased out from the next financial year.
In 2006-07, the revenue foregone just on account of 16 direct tax incentives and deductions available to corporate India was just over Rs 50,000 crore, 44 per cent more than the previous year.
Commercial entities claiming income tax exemption by registering under Section 12A of the Income Tax Act, 1961, as charitable organisations have been under the Central Board of Direct Taxes (CBDT) scanner for some time.
CBDT thinks companies are taking advantage of the definition of what constitutes charitable activity in Section 2 of the Income Tax Act, 1961.
The section says: “Charitable purpose includes advancement of any other object of general public utility”.
The definition will have to be amended, the official added.
Pointing out that an institution like the Mormugao Port Trust (MPT) among many others is registered as a charity, the official said most port trusts are doing commercial business, but claim income tax exemptions under Section 12A.
“There are others too — a state government-owned road transport, a chamber of commerce, north India’s largest agricultural trading committee and a leading maritime board in West India — are registered as charitable trusts. None of them are doing any charity as such,” the official added.
However, the Mormugao Port Trust maintains that it is rendering a public service and claimed that the courts have upheld its stance.
“Not a single rupee goes as dividend to government or anyone else. Every surplus rupee is spent for maintenance and development of the port. It qualifies as a charitable institution completely," said Praveen Agarwal, chairman, Mormugao Port Trust.
"Twelve major ports plough back Rs 600 to Rs 700 crore, which otherwise would have gone towards tax, every year for expansion and development of ports. Tax on our income will inhibit expansion plans," Agarwal added.
Tax experts point out that unless the definition of “charitable activity” is changed in law, the Income Tax would continue to lose in litigation on this account.
“Many tribunals have upheld such entities as charitable trusts due to the definition which includes public utility”, the official said.
Top Indian software companies are making a bigger contribution to the exchequer, than was the case a year ago. Frontline software companies have seen a significant increase in their tax incidence over the past year, going by their September quarter results. Of the top five, TCS, Infosys Technologies, Satyam Computer and HCL Technologies have seen taxes taking away a larger share of their profits in September 2007, compared to the same quarter in 2006.
Wipro lowered its tax outgo in this period, probably due to its mix of IT and non-IT businesses. The tax incidence for these companies now hovers between 10 and 15 per cent of their profits, compared to 8-13 per cent a year ago. For over 2,000 listed companies of India Inc, it averaged 30 per cent in the September quarter.
Infosys, which has seen its tax incidence surge from 11.7 per cent in September 2006 to 15 per cent in the latest quarter, attributes this increase primarily to a higher proportion of revenues generated onsite (delivering services at the client’s location).
Typically, high value services such as consulting, package implementation and engineering services, as well as some low value services, are rendered at the client’s premises or close to the client’s location. Revenues and profits generated from these services are taxable in the respective countries. This could also explain the increase in tax outlay for other top tier companies such as TCS, Satyam or HCL Tech, as these companies derive over 50 per cent of their revenues from onsite work. As tier-I companies move up the value chain, this proportion may be expected to increase, unless such services are offshored.
Tax incidence for all of the IT majors are expected to edge up in future, as the tax shelter on operations out of software technology parks (STPI) are phased out. Both Infosys and TCS have indicated that as the current STPI scheme and its attendant tax benefits cease from 2009, the tax incidence may go up. All these companies are looking to move operations to SEZs and have indicated that tax incidence could be in the 20-22 per cent range, during the transition phase.
150,000 salaried individual taxpayers will have to re-file their returns
Wednesday, November 21, 2007
Nearly 150,000 salaried individual taxpayers will have to re-file their returns for the 2007-08 assessment year, as their returns went up in smoke during a recent fire in the income-tax office at Mayur Bhawan in Connaught Place. The October 6 incident gutted the entire seventh floor.
Re-filing is must for processing income tax refund claims, as well as tax payments by assessees of Range 44 and 45 of the Delhi income tax zone.
Range 44 covers employees and pensioners of public sector undertakings, while Range 45 includes employees and pensioners of schools and colleges.
Taxpayers have time till November 30 to file the returns. A notification to this effect has already been issued by the chief commissioner of income tax (Del
Not only are taxpayers required to file copies of the income tax return and the acknowledgment issued by the income tax department for assessment year 2007-08, they will also have to file returns for assessment year 2006-07 if they have not received tax refunds.
To make things easy for taxpayers, a representative of the PSU, school or college can file the returns in bulk. If taxpayers do not file returns, they may face difficulty in getting refunds.
The fire is also believed to have gutted documents related to recent searches of a real estate company. This is not the first time that Mayur Bhawan has been affected by fire.
The Income Tax department will soon introduce a new accounting tool that will be used against business houses suspected of concealing huge income by fudging their accounts and making fake entries to concoct balance-sheets. To be called Computer Assisted Analysis Tool (CAAT), the new accounting technique will be used during scrutiny assessments of corporates and also by the income tax investigation wing to analyse records seized during I-T raids. The new accounting tool will be capable of identifying squared up loan accounts, new loans, journal entries which are out of balance and posted at the end of the month or towards the end of the year to manipulate balance-sheets. Equipped to spot suspect transactions, CAAT can show up missing invoices besides recognising patterns and linkages between different groups of data and identify items requiring detailed investigation. The software has been developed after reviewing various accounting devices used by the investigating agencies in some of the developed countries to audit company accounts and banking business. It is believed to be similar to the Win-Idea, an analysis tool used by the Canadian tax department to investigate cases of tax evasion. Sources said CAAT would help the department identify hawala entries as it would be equipped with data of all known hawala operators in the country. Books of a suspect business house would be analysed using the tool to identify the details of hawala entries. Some of the other utilities of the specialised tool include search for post box addresses, identical phone numbers and addresses of fictitious vendors, identification of duplicate invoices and spotting purchase quantities not mentioned in the agreement. Coming soon after the finance ministry’s decision to set up Computer Forensic Laboratories (CFLs) under the investigation arm of the I-T department, the tool would help proper analysis of data seized during raids and kept in the safe custody of CFLs. The CFLs are supposed to store digital records seized during search-and-scrutiny operations of the department and will be used as a ‘library’ by sleuths for extracting corroborative evidence in reference to a case at any future date. Information in CFLs will be kept in compact discs (CDs) that will be protected by special security safeguards difficult to tamper and which can serve as forensic proof
No. 402/92/2006- MC (46 of 2007)Government of India/ Ministry of FinanceDepartment of RevenueCentral Board of Direct TaxesNew Delhi, the 31 st October 2007PRESS RELEASE The Central Board of Direct taxes have extended the last date of filing of income tax /fringe benefit tax returns due by 31 st October 2007 as follows:-For electronic returns (companies, and firms requiring tax audit u/s 44AB) to 15 th November 2007; andFor paper returns (other than those required to file electronic returns) to 2 nd November 2007.It is further clarified that the dates for obtaining tax audit report under section 44AB of the Income Tax Act have also been extended accordingly.
