MCA continues clarifying RPTs- exempts IDs of holding company from the definition
CS Vinita Nair
Preamble
Ministry seems determined to make things 'absolutely clear' pertaining to related party and transactions entered into with such related parties. In a week's time, MCA firstly issued Companies (Removal of Difficulties) Fifth Order, 2014 dated 9th July, 2014 amending clause (v) of Section 2(76) of Act, 2013 by replacing 'or' with 'and'. This was followed with clarifications on matters relating to related party transactions vide general circular no. 30/2014 dated 17th July, 2014. Thereafter, MCA has now further amended the definition of related party by amending Companies (Specification of definition details) Rules, 2014 vide notification dated 17th July, 2014 (Present Notification) which shall come into force on the date of their publication in Official Gazette.
Amendment made by means of Present Notification
Rule 3 of Companies (Specification of definition details) Rules, 2014 has been amended to insert words 'other than independent directors'. The amended rule post amendment will stand as under:
3. Related party – For the purposes of sub-clause (ix) of clause (76) of section 2 of the Act, a director other than an independent director or key managerial personnel of the holding company or his relative with reference to a company, shall be deemed to be a related party.
While the intent to exclude Independent Directors (IDs) of the holding company is evident in the drafting, it is however, uncertain whether relatives of such IDs of holding company remain excluded from the definition. The term 'his relative' relates to the director and Key managerial personnel of the holding company included in the definition. If IDs are excluded in case of directors, relative of such IDs cannot be said to remain included in the definition.
Thus, IDs of holding company and their relatives will not be included in the definition of related party.
However, it is important to note that in case any of the IDs of a holding company which is listed on a recognized stock exchange is appointed on the Board of its material non-listed Indian subsidiary company pursuant to clause 49 of the equity listing agreement, then such ID and his relative will be regarded as a related party pursuant to clause (i) of sub-section 76 of Section 2 of Act, 2013.
[The above post is contributed by CS Vinita Nair at Vinod Kothari & Co. She can be contacted at vinita@vinodkothari.com]
Exemption wrongly claimed gets detected during processing of I-T Return -FM
Irregularities in Providing Tax Concession
Exemptions and tax concessions under the Income-tax Act, 1961 ('Act') are provided in accordance with the provisions of the Act. However, any exemption or tax concession wrongly claimed in the returns of income filed by the tax payers are liable to be detected during processing of such returns or their scrutiny.
The monitoring mechanism prevalent for detection of such cases as of now includes system of Audit (both Internal and C&AG) and inspections/reviews done by supervising authorities. No such data is maintained for the number of cases arising therefrom and action taken theron and the outcome therefrom in a centralized manner.
This information was given by the Union Minister of Finance, Shri Arun Jaitley in written reply to a question in Lok Sabha today.
[2014] 47 taxmann.com 217 (Article)
Judicial Rulings that spurred amendments by Finance Bill 2014
| 1. Disallowance of CSR expenditure under section 37(1) | ||||||||||
| Proposed amendment | The Finance Bill, 2014 has proposed to insert a new Explanation in Section 37(1) so as to clarify that any expenditure incurred by an assessee on the activities relating to CSR referred to in section 135 of the Companies Act, 2013 shall not be deemed to be an expenditure incurred by the assessee for the purpose of the business or profession and, therefore, no deduction would be allowed for such an expenditure. | |||||||||
Judicial Rulings | There were many case laws where it was held that expenditures on activities, which could be categorized as CSR expenditure, shall be treated as admissible expenditure under section 37(1). Now all such judicial precedence will be nullified from a CSR prospective.
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| 2. Section 54/54F exemption restricted to investment in one residential house only | ||||||||||||||||||||||
| Proposed Amendment | The Finance Bill, 2014 proposes to restrict the benefits under sections 54 and 54F for investment in purchase or construction of one residential house in India. Following two changes are proposed in section 54F:
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Judicial Rulings | Various Tribunals and High Courts have allowed exemptions to assessee under sections 54 and 54F for investment in multiples houses. The exemptions under sections 54 and 54F were introduced to encourage people to invest in new residential houses for the purpose of their self-occupation. These exemptions were not contemplated to incentivize the taxpayers purchasing the residential accommodations as a part of their investment portfolio. The proposed amendment would overcome the following legal precedents:
The Tribunal's decisions on allowability of deductions under section 54F for investment made outside India:
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| 3. Investment for deductions under section 54EC proposed to be limited to Rs. 50 Lakhs | ||||||||||
| Proposed Amendment | Exemption under section 54EC is proposed to be limited to Rs. 50 lakh even if investment is made in two different financial years. | |||||||||
| Judicial Rulings | In the following cases the ITAT benches have held that the assessee can invest up to Rs. 1 Crore in capital gain bonds under section 54EC which is spread over a period of two financial years at Rs. 50 lakhs in each financial year. However, such investment should be made within a period of 6 months from the date of transfer:
In Smt. Sriram Indubal case (supra) it was held that the limit for investment of Rs. 50 lakhs is with reference to one financial year. Where the assessee is able to invest within the prescribed time of 6 months but falling in two financial years, the eligibility for exemption under section 54EC for both the deposits is satisfied. However, the Jaipur Bench of ITAT in the case of Asstt. CIT v. Shri Raj Kumar Jain & Sons (HUF) [2012] 19 taxmann.com 27/50 SOT 213 has struck a different note by opining that as per section 54EC investment within 6 months is investment for that particular financial year in which transfer has taken place and said period of six months would not include some part of subsequent financial year. In other words, an assessee is not eligible to claim more than Rs. 50 lakhs under section 54EC of the Act as exemption in an assessment year. | |||||||||
| 4. Forfeiture of advance money received for transfer of capital asset is taxable as residual income | |
Proposed Amendment | It has been proposed to insert a new clause in section 56(2) to provide that any advance received on transfer of capital assets shall be chargeable to tax under head 'income from other sources', if such sum is forfeited and the negotiations do not result in transfer of capital assets. A consequential amendment is also proposed to section 2(24) to include such income in the definition of the term 'income'. Where any sum of money is received as advance or otherwise in the course of negotiations for transfer of a capital asset and it is subsequently forfeited by the transferor and the negotiation does not result in transfer of such capital asset, the amount of advance money forfeited is chargeable to tax under the head 'income from other sources'. |
| Judicial Rulings | In Travencore Rubber & Tea Co. Ltd. v. CIT [2000] 243 ITR 158/109 Taxman 250 (SC) it was held that forfeiture of advance money received for transfer of capital asset cannot be treated as revenue receipt chargeable to tax. |
| 5. Non-profit Organizations availing of benefit of sections 11 and 12 to be denied benefit of section 10 | |
| Proposed Amendment | Where a trust or an institution has been granted registration for the purposes of availing exemption under section 11 while computing the income applied towards pursuing the objects of the trust cannot claim any exemption under section 10 for non-application of such income. However, this bar will not apply to agricultural income. |
Judicial Rulings | This amendment is proposed due to interplay of the general provision of exemptions which are contained in section 10 of the Act vis-a-vis the specific and special exemption regime covered in sections 11 to 13. Sections 11, 12 and 13 are special provisions governing institutions which are being given benefit of tax exemption, it is, therefore, imperative that once a person voluntarily opts for the special dispensation it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions or specific provisions at will. Allowing such flexibility has undesirable effects on the objects of the regulations and leads to litigations. Recently, the Pune ITAT in the case of Bharati Vidyapeeth Medical Foundation v. Asstt. CIT [2013] 37 taxmann.com 242/144 ITD 510, held that when law permits assessee to claim exemption under section 10(23C) or section 11, choice should be left to assessee. Department cannot force assessee to adopt only a particular provision. |
| 6. Meaning of 'substantially financed' by the Government under section 10(23C) clarified | |||||||
| Proposed Amendment | The existing provisions of section 10(23)(iiiab) and 10(23C)(iiiac) of the Act provide exemption in respect of income of certain educational institutions, universities and hospitals ('eligible entities') which exist solely for educational purposes or solely for philanthropic purposes, and not for purposes of profit and which are wholly or substantially financed by the Government. Therefore, an Explanation is proposed to section 10(23C) that if the Government grant to eligible entities exceeds a percentage (to be prescribed) of the total receipts (including any voluntary contributions), then such eligible entities shall be considered as being substantially financed by the Government for that previous year. | ||||||
Judicial Rulings | The meaning of the term 'substantially financed by the Government' has been subject matter of litigation. In the following cases, various Courts have dealt with the issue to establish whether eligible entities are substantially financed by the Government.
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| 7. Depreciation on assets not to be considered for computing application of income for charitable purpose | ||||||||||||||||||||||||||||||||||
| Proposed Amendment | The Finance Bill, 2014 proposes that depreciation will not be considered as application of income if the asset on which alleged depreciation is claimed has already been considered as a part of application of income by trust. This amendment would be effective from 1-4-2015, hence, will apply in relation to Assessment Year 2015-16 onwards. | |||||||||||||||||||||||||||||||||
Judicial Rulings | With this proposal, the controversy over deduction to a trust for the depreciation on assets, the full acquisition cost whereof has already been claimed as application of income, has been laid to rest by the Finance Bill, 2014.
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| 8. No reopening of assessment if trust obtained registration in subsequent year | |
| Proposed Amendment | It is proposed that reassessment of a trust cannot be initiated on ground of non-availability of its registration in the relevant year if it is granted registration subsequently and its objects and activities are same which have been considered while granting it registration. This amendment would be effective from 1-4-2015 and would apply from assessment year 2015-16 onwards. |
Judicial Rulings | It would be a great relief for NGOs and Trusts getting registration under section 12AA. Hitherto they were allowed tax exemptions only from the Financial Year in which the application for registration was made and the assessments of the earlier years were re-opened to deny the deductions under Sections 11 and 12 on the grounds of non-availability of the registration in those year. In CIT v. Jaipur Stock Exchange Ltd. [1995] 82 Taxman 49 (Raj.) it was held that once a trust is registered, it is eligible for exemption, irrespective of the date from which the registration is granted. The Finance Act, 2007 inserted section 12A(2) whereby in respect of applications made on or after 1-6-2007, the provisions of sections 11 and 12 were applicable to the trust or institution only from the assessment year immediately following the financial year in which such application was made. Thus, the amendment proposed in the Finance Bill, 2014 will come in the way of the Revenue from reopening the tax assessments for the preceding years if the objects and activities of the applicant were the same even for the prior years preceding the year of seeking registration under section 12AA. |
| 9. Speculative transactions and speculative businesses | |||||||
| Proposed amendment | An amendment is proposed to section 43(5) to provide that the eligible transactions in respect of trading in commodity derivative carried out in recognized association and chargeable to CTT shall not be considered to be speculative transactions. Further,it is proposed that provisions of Explanation to section 73 shall not be applicable to a company the principal business of which is the business of trading in shares. | ||||||
Judicial Rulings | Where business of a share broker constitutes only sale or purchase of shares, the entire business would be deemed as speculative business. Thus, the existing provision was making it difficult for such brokers to avail of extended period to carry forward the losses and to claim set off of losses. Hence, it is proposed to amend the Explanation to Section 73 so as to provide that the provision of the Explanation shall also not be applicable to a company the principal business of which is the business of trading in shares. The interplay between section 43(5) and section 73 has been dealt with in the following cases:
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| 10. Proposal to grant Status of 'capital assets' to securities held by FIIs | ||||||||||
| Proposed amendment | It has been proposed to expand the meaning of the term 'capital asset' by including any security held by Foreign Institutional Investors ('FIIs') who have invested in it in accordance with the regulations made under the SEBI Act. | |||||||||
Judicial Rulings | The Finance Bill, 2014 proposes that securities held by a FII shall be deemed as 'Capital Asset'. This proposal will end the controversy of categorization of income of FII as business income or capital gains.
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| 11. Use of multiple year's data for comparability analysis | ||||||||||||||||||||||
| Proposed amendment | In his budget speech, the Hon'ble Finance minister has laid down the proposal to allow the use of multiple year's data for the comparability analysis. However, nothing in this regard has been specified in the Finance Bill; It is most likely that any amendment to the provisions in this regard would be brought in by the amendment to the rule 10B of the Income-tax Rules, which would be notified subsequently. | |||||||||||||||||||||
Judicial Rulings | Presently, most of the taxpayers are using the multiple year's data for the comparability analysis in the transfer pricing documentation. However, during the assessment proceedings, tax-authorities do not accept this approach of the taxpayers. Consequently, citing the violation of rule 10B(4), the tax authorities proceed to reject the transfer pricing documentation prepared by the taxpayer and recompute the arm's length price using the single year's data.
Other cases on use of multiple year's data for comparability analysis:
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| 12. Deemed International Transaction under section 92B | |
| Proposed amendment | Section 92B(2) creates a deeming fiction and categorises a transaction entered into by an enterprise with an unrelated person as an international transaction, if there exists a prior agreement between the unrelated person and associated enterprise. The position adopted by the taxpayer to overcome the applicability of provisions of section 92B(2) is that where the unrelated person is a resident, such transaction shall not be considered as an international transaction. Section 92B(2) is proposed to be amended to provide that where either or both of the AEs are non-residents then such transaction shall be deemed to be an international transaction whether or not the unrelated person is a non-resident. |
Judicial Rulings | Where assessee and its associated enterprise were residents of India for tax purposes, transaction between them would not constitute an international transaction and, in such a situation, basic premise for invoking deeming fiction under section 92B(2) would not arise – Swarnandhra IJMII Integrated Township Development Co. (P.) Ltd. v. Dy. CIT [2013] 32 taxmann.com 395/ 58 SOT 117 (Hyd. - Trib.) |
| 13. Estimation of value of assets by Valuation Officer | ||||||||||
| Proposed amendment | The provision has been proposed to be amended to provide that AO may make a reference to the Valuation Officer (VO) whether or not he is satisfied about correctness or completeness of the accounts of the assessee. | |||||||||
Judicial Rulings | The amendment is proposed to overcome the decision of the Supreme Court in the case of SargamCinema v. CIT [2011] 197 Taxman 203. The Supreme Court has held thatthe Assessing Officer (AO) has a power to make a reference to the Valuation Officer (VO) for estimating the value of investment, bullion, jewellery, etc. Before making a reference to the VO it is mandatory for the AO to reject the books of account. Following the above judgment various High Courts have held as under:
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Govt constitutes Committee to resolve cost audit row
No.52/22/CAB/2014
GOVERNMENT OF INDIA
MINISTRY OF CORPROATE AFFAIRS
GOVERNMENT OF INDIA
MINISTRY OF CORPROATE AFFAIRS
5th Floor, "A" Wing, Shastri Bhavan
New Delhi -110001
Dated: the 19th July, 2014
New Delhi -110001
Dated: the 19th July, 2014
OFFICE MEMORANDUM
Sub.: Constitution of Expert Committee to examine issues relating to maintenance of Cost Records and Cost Audit.
The undersigned is directed to say that representations have been received from members of the Institute of Cost Accountants of India after notification of the Companies (Cost Records and Audit) Rules 2014, expressing grievances about the scope of the rules and their implications for the profession of Cost Accountancy. The matter has been examined and a view has been taken by the competent authority that the above and other related issues need to be considered by a group of experts. Accordingly, the competent authority has decided to constitute an Expert Committee consisting of the following:
- Shri R.S. Sharma, former CMD, ONGC – Chairman
- Shri R.K. Jain, Additional Secretary, Ministry of Health & Family Welfare – Member
- Shri Chandra Wadhwa, former President, ICWAI – Member
- Smt. Aruna Sethi, Adviser (Cost), Ministry of Corporate Affairs – Member-Convener (The Chairman in consultation with the Committee may co-opt upto two members having regard to the exigencies of the Terms of Reference)
- The terms of reference of the Committee shall be as under:
a) To examine the Companies (Cost Records and Audit) Rules 2014, including the prescribed classes of companies/industries/sectors, the threshold limits and recommend appropriate changes/modifications to be made thereunder keeping in view rational and relevant criteria to determine the basis of including or excluding a class or classes of companies;
b) To examine the current Cost Audit scenario in the country and to suggest measures to optimally utilize Cost Audit as an instrument of promoting transparency and efficiency in business and industry;
c) To identify and suggest principles that should govern assignment of greater opportunities to Cost professionals;
d) To suggest measures to enhance the utility of Cost Audit Reports to Government and other regulators/related agencies and the manner and extent of their filing;
e) To study prevalent international practices relating to Cost Records in large economies and draw comparison to the current Indian scenario;
f) To look into and make suitable recommendations about issues incidental to the above.
- It is expected that the Committee will hold detailed consultations with the Institute of Cost Accountants of India, members of the profession and other stakeholders interested in the Terms of Reference. Such consultations could be in person or through other means of communications.
- The Committee may submit its report within a period of three months from its first meeting. Adviser (Cost) will render necessary secretarial and logistics support.
(Animesh Bose)
Assistant Director (Policy)
Recognition Of Seniority Of A Ca Firm On Its Conversion To LLP
RECOGNITION OF SENIORITY OF A CA FIRM ON ITS CONVERSION TO LLP- Policy of O/o C&AG
In respect of "Recognition of seniority of a CA Firm on its conversion to LLP", the O/o C&AG has informed as under:
(a) The LLP firms registered with ICAI only will be considered for empanelment.
(b)The seniority of such firms will be maintained as per policy in-vogue based on the points score calculated for the Chartered Accountant members only.
(c) LLPs will be considered for appointment/reappointment as statutory auditors of PSUs considering their seniority along with other Chartered Accountant firms.
FM on Why tax exemption not raised to Rs. 5 Lakh?
Extract of FM Speech in Lok Sabha During Budget Discussion on Friday 18.07.2014
A defining moment against us, both to the domestic investors and international investors, was the idea of a retrospective tax. Any economy, which can enact a retrospective tax and say this applies 40 years earlier, destabilises businesses, and, therefore, the world was not willing to accept it.
When you say that it is your Budget, the retrospective tax mess was created by you. We have tried to substantially resolve the problem. The whole regime of tax terrorism where civility had to be added to it, the problem was created by you. How can the two be similar? So, as far as taxation is concerned, we have said that there will be no retrospective tax as far as the future is concerned. We have given a cushion that we would not tax people retrospectively creating fresh liabilities. We are trying to create an environment where GST be enabled in this country. We have taken a radical step by saying that the facility of advance ruling will be available when Indians invest in business in India. The non-residents were entitled to it.
There are not many occasions where the limit has been raised by Rs.50,000 even. My friend Dr. Shashi Tharoor is not here. He asked: "Why should it not be Rs.5 lakh?" I wish, his Party had done even half of it. But then this is the beginning.
One of my only regrets is that we do not have enough money in our pocket to make it to that figure. But it is not this alone. When I said that savings have come down from 33 per cent to 30 per cent, the 80C exemption being raised from Rs.1,00,000 to Rs.1,50,000, it is to encourage small tax payers and all tax payers to save more. When they deposit it in their savings, that money goes in for national development and infrastructure building. It goes into banks; it goes into provident fund; and it goes into several other securities. There also I have raised it by Rs.50,000.
FM Asks I-T Officers to Use Non Intrusive & Innovative Methods of Investigation
Finance Minister Asks Officers of Income Tax Department to Maximise the Use of Non Intrusive and Innovative Methods of Investigation; Calls for Training for Upgradation of Skills and Need for Capacity Building
The Union Finance Minister, Shri Arun Jaitley exhorted the officers of the Income Tax Department to maximize the use of innovative and non-intrusive methods of investigation. He impressed upon the need for skill development and up-gradation to keep pace with newer and innovative methodologies adopted to evade taxes. The Finance Minister Shri Jaitley emphasized that the Department should equip itself with the State of the Art technological skills, including, in the area of analysis of digital evidence. The Finance Minister Shri Arun Jaitley was addressing the meeting of Directors General of Income Tax (Investigation and Intelligence & Criminal Investigation) and Chief Commissioners of Income-Tax (Central) here today. The Finance Minister observed that the quality of representation of cases of Income Tax Department before various courts of law needs to be improved. He stressed upon devising mechanisms to attract the best talent and build expertise in the specialized subject of taxation. The Finance Minister Shri Jaitley also impressed upon the need of imparting training to the middle level officers in order to improve their forensic skills to successfully deal with new tools of technology being used for tax evasions. The Finance Minister also called for taking necessary steps to adopt the emerging methods of capacity building.
The meeting was attended along with the Finance Minister by Shri Shaktikanta Das, Revenue Secretary, Chairman and Member (Investigation) CBDT, Directors General of Income Tax (Investigation and Intelligence & Criminal Investigation) of different Regions and Chief Commissioners of Income-Tax (Central) along with other senior officers of the CBDT among others.
Speaking on the occasion, Shri Shantikanta Das, Revenue Secretary appreciated the sensitivity of the tasks assigned to the Investigation Directorates and advised the officers to be firm and fair in their approach towards the tax payers.
Earlier Shri K.V. Chowdary, Member (Investigation), CBDT, highlighted the performance of the Investigation Directorates in Financial Year 2013-14 in the major areas of their functioning including, inter-alia, search and seizure operations, surveys, widening and deepening of tax base, action on intelligence inputs received from other agencies of the Government. During the year 2013-14, searches conducted by the Income-tax Department led to seizure of assets worth Rs. 807.84 crore and admission of undisclosed income u/s 132(4) of IT Act, 1961 of Rs. 10,791.63 crore. The number of prosecutions launched during the year 2013-14 was 641, which is an increase of 127% in comparison to the immediately preceding year. The success rate in convictions on prosecutions launched by the Department is 90.6% (including 561 cases compounded by the Department). During the year 2013-14, the Department in its efforts to widen and deepen the tax base, undertook new projects for the collection and analysis of data from Urban Cooperative Banks (UCBs) and Cooperative Credit Societies (CCSs), Companies who have made open offers for the acquisition of shares and banks. The analysis of data resulted in identifying large number of new tax payers and additional incomes in the cases of existing tax payers. The amounts in these categories are income of Rs 4,442 crore in the case of UCBs/CCSs, Sale consideration of Rs 1743.91 crore in the case of the Project on Open offer where returns were not filed and income of Rs 1,383 crore in the case of Project on Banks etc.
Source- PIB
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