Tax Issues -NBFC - WIRC · -Godrej & Boyce Mfg Co. Ltd 210 ITR 81 (Mum) KEY JUDGEMENTS ON S.14A No...

Tax Issues - NBFC

Presented by CA Mahazaver Patel for

1

KEY REVENUE ISSUES

INTEREST ON LOANS & DEPOSITS

PROFIT ON

DIVIDEND

PROFIT ON SALE OF

SECURITIES

PREMIUM RECEIVED

UPFRONT FEES / UNDERWRITING

COMMISSION

2NBFC - Tax Issues03/09/2011

KEY EXPENDITURE ISSUES

DEPRECIATION ON LEASED

PRELIMINARY EXPENSES U/S

35D ON LEASED ASSETS

BAD DEBTS U/S 36(i)(vii) INVESTMENTS

WRITTEN OFF

35D


DIVIDEND RECEIVED

NBFC - Tax Issues 4

DIVIDEND RECEIVED

03/09/2011

DIVIDEND /

TAXFREE INVESTMENTS

IS 14A DISALLOWANCE MADE?

NoYES

WORKING

u / r 8D

NoYES

WHY NO

DISALLOWANCE?


� 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

KEY ISSUES ON RECEIPT OF

DIVIDEND AND INCOME ON

TAX-FREE INVESTMENTS

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


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)



� 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)- 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. 1406.2010


� 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 2008-09. 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/2009.


� 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) 2006


- DCIT v Maharashtra Seamless Ltd ITA 4063 (Del) 2006

- CIT v K Raheja Corporation Pvt. Ltd ITA 1260 of 2009

- Yatish Trading Co P Ltd v ACIT 2011 129 ITD 237 (Mum)



� 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/2005.

- Minda Investments v DCIT ITA No.4046/Del/2009- 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 112


PROFIT ON SECURITIESPROFIT ON SECURITIES


SALE OF SECURITIES

CAPITAL GAINSBUSINESS INCOME CAPITAL GAINSBUSINESS INCOME

STOCK-IN-TRADE v INVESTMENT


Circular No 4 / 2007 dated 15.06.2007

-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

KEY JUDGEMENTS ON

CAPITAL GAINS v BUSINESS INCOME

& 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.


� 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

KEY JUDGEMENTS ON


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/2008


� 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

KEY JUDGEMENTS ON


� 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)


� 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)

KEY JUDGEMENTS ON


- 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/2009


KEY JUDGEMENTS ON


� 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)


DEPRECIATIONDEPRECIATION


� 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.

DEPRECIATION ON LEASED ASSETS

as business income.

- CIT v Shaan Finance Limited 231 ITR 308


PRELIMINARY EXPENSES

NBFC - Tax Issues 21

PRELIMINARY EXPENSES

03/09/2011

KEY ISSUES

Expenses incurred on Public Issue of shares is not

applicable u/s 35D of the Income Tax Act, 1961.

- Bombay Burmah Trading Corp v CIT 145 ITR 793

- Birla Global Finance Ltd v ACIT 13 SOT 600 (Mum)- Birla Global Finance Ltd v ACIT 13 SOT 600 (Mum)

- CIT v Glaxo Ltd 189 ITR 59


BAD DEBTSBAD DEBTS


� 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)

KEY ISSUES AND RELEVANT

JUDGEMENTS

- 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)


� 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)


JUDGEMENTS

� 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


� 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)


JUDGEMENTS

- CIT v Star Chemicals 313 ITR 126 (Bom)

- C IT v Girish Bhagwan Prasad 256 ITR 772 (Guj)



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.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)


OTHER ISSUESOTHER ISSUES


� 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


JUDGEMENTS

- 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


� 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


JUDGEMENTS

� 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-in-

trade

- American Express International Banking Corporation

258 ITR 601 (Bom)

- Union Bank of India 268 ITR 216


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)


JUDGEMENTS

- 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)


TDS

32

TDS


� 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


JUDGEMENTS

� 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


VAT / CST

NBFC - Tax Issues 34

VAT / CST

03/09/2011

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


SERVICE TAX

36

SERVICE TAX

NBFC - Tax Issues03/09/2011

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 -33852)

- Madras Hire Purchase Association (16 STR 3 – MAD)- 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.


THANK YOU

CA Mahazaver Patel, Chartered Accountant

[email protected]

� Disclaimer: The views expressed herein in this presentation summary are the personal viewsof the speaker and intended for general guidance only and should not be construed to be aprofessional advice or sufficient for making any decisions. The presenter does not accept anyresponsibility for loss arising to any person acting or refraining from action as a result ofany material in this presentation summary. On any specific matter, reference should be madeto the appropriate advisor.


Tax Issues -NBFC - WIRC · -Godrej & Boyce Mfg Co. Ltd 210 ITR 81 (Mum) KEY JUDGEMENTS ON S.14A No...

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