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On 1st February 2023, the Hon’ble Finance Minister, Nirmala Sitharaman, presented Union Budget 2023 in the Lok Sabha. Hon’ble Finance Minister’s impetus on the Green Growth and Infrastructure Capex in this fiscal year’s Budget is laudable. She also remarked that in order to strengthen the “ease of doing business” in India, more than 39,000 compliances are reduced. She introduced certain rationalisation measures which were long overdue under the Direct Tax Law but ironically also increased few compliances under the TDS / TCS provisions. We have attached our insights / analysis on the key direct tax amendments proposed in the Finance Bill, 2023. Click here to view the budget analysis

Union Budget 2023 – Analysis of key direct tax proposals

Our Hon'ble FM gave an overview of few proposals. However, as we read the fine print of the Finance Bill, 2022 and the Explanatory Memorandum to the Finance Bill, there are several amendments which were not covered / discussed at length in the Budget Speech. We have attached Insights and analysis on the key direct tax amendments proposed in the Finance Bill, 2022.

Union Budget 2022 – Analysis of Key Direct Tax Amendments

The Hon’ble Finance Minister presented the Budget 2020 on 1st February 2020 proposing measures for providing stimulus to the economy, means for meeting fiscal deficits, and addressing the NBFC liquidity issues, among other concerns.  On the direct tax front, she tried to rationalise personal income tax rates on the lines of the corporate income tax changes announced in September 2019 and announced a slew of measures contemplating that it would simplify the current direct tax law. However, as they say “the devil lies in the details”. We have attached below our insights on the key proposals announced in relation to the direct tax amendments. Analysis of Key Direct Tax Proposals (PSA)

Union Budget 2020 – Key Direct Tax Insights

Shri Satendra Koushik v ITO (ITA No. 392/JP/2019 dated 23.04.2019) Background: Tax payer purchased Land vide a registered purchase deed for consideration of Rs. 15 lakhs. The land was reflected as Stock-in-trade by the tax payer The stamp duty value of the said land was Rs. 49,23,542. During the course of assessment proceedings, the AO treated difference of Rs. 34,23,542/- i.e. between stamp duty value and purchase price as deemed income of the assessee u/s. 56(2)(vii)(b)(ii). CIT(A) upheld AO’s order. Tax Payer’s contentions: Tax payer is engaged in real estate business and regularly deals in sale and purchase of lands and buildings and hence provisions of section 56(2)(vii)(b)(ii) are itself not applicable. As per the Explanation (d) of section 56(2)(vii), the term ‘property’ is defined to mean only capital asset which inter-alia includes immovable property being land or building or both. HELD: The provisions of section 56(2)(vii) were introduced as a counter evasion mechanism to prevent laundering of unaccounted income. The provisions were intended to extent the tax net to such transactions in kind. The intent is not to tax the transactions entered into in the normal course of business or trade, the profits of which are taxable under specific head of income. Therefore, the definition of property has been amended to provide that section 56(2)(vii) will have application to the ‘property’ which is in the nature of a capital asset of the recipient and therefore would not apply to stock-in-trade, raw material and consumable stores of any business of such recipient.

Receipt of Property treated as Stock-in-trade below FMV not subject to gift tax u/s 56(2)(vii) ...

Priapus Developers (P.) Ltd v ACIT [2019] 104 298 (Delhi – Trib.) Background: Two subsidiary companies of the assessee were amalgamated with the assessee company. Delhi High Court had sanctioned the scheme of Amalgamation. As per the Scheme of Amalgamation the accounting principles and ‘purchase method’ as prescribed in ‘AS-14 was adopted. Further, as per the Scheme, all the assets and liabilities of the amalgamating companies were to be transferred at their respective fair values. The scheme also provided for transferring any excess (difference between fair value and book value of the assets) to capital reserve. Equity shares of a listed company – IFHL held by the subsidiary company were revalued and recorded in the books of the assessee company at fair value. The difference between book value of the shares so acquired and the FMV at which it was recorded in the books of the assessee being the amalgamated entity was credited to capital reserves. In the subsequent year, the shares were sold at a loss and STT was paid thereon. In the year of amalgamation, the transfer of assets were claimed as exempt by virtue of section 47(vi). No adjustment was made in relation to the revaluation / excess value of the shares credited to capital reserves in the MAT computation u/s 115JB in the year of amalgamation. The sale of shares at a loss in the subsequent year was disallowed by the assessee itself u/s 10(38). However, the loss on sale recorded in the P&L A/c was not separately disallowed in the MAT computation u/s 115JB. The AO observed that reserve created on account of revaluation of shares was not credited to P&L A/c and held that in terms of clause (v) to Explanation 1 of section 115JB, such revaluation of shares has to be taken into account while computing the book profit. In the first level of appellate proceedings, the CIT(A) upheld the order of AO. Revenue’s Arguments: Amalgamation has been used by the assessee as a tool for tax evasion. As per AS-13 for accounting for investments, investments are to be carried at cost and not fair market value. Further AS-13 also clarifies that difference between carrying amount and disposal proceeds net of expenses, has to be recognised in the P/L A/c. Thus, the assessee has not even followed the accounting treatment required to be followed as per AS-13. The adoption of fair market value of the Investments is nothing but revaluation. Merely, the credit of increase in value to “capital reserve” would not alter the true character and substance of the event. HELD: The scheme has been duly approved by Delhi High Court. High Court had issued notices to the Income Tax Department / Assessing Officer to provide any objections to the said Scheme, if any. The Assessing Officer/ Department nowhere had objected to said Scheme at any point of time. Thus, Scheme of Amalgamation sanction by High court had become final. Reliance was placed on the Supreme Court in the case of […]

No adjustment of revaluation u/s 115JB upon amalgamation when the same is credited to capital ...

CIT v Reliance Industries [2019] 410 ITR 466 (SC) Facts: Assessee had given interest-free loans to its subsidiaries as on 31-03-2003 aggregating Rs. 6,716.12 crores and as on 31-03-2002 was 2,988.98 crores; thus the incremental loans given during the year amounted to Rs. 3,727.14 crores. The net profit after tax and before depreciation exceeded not only the differential/incremental loan given to subsidiaries during the year but also exceeds the total interest free loans of Rs. 6,716.12 crores given to the subsidiaries as on 31-3-2003. Bombay High Court’s decision: It is already settled principle by this Court in the case of Reliance Utilities & Power Ltd that if there were funds available both interest free and overdraft / or loans taken, then presumption would arise that investment would be out of interest free funds generated or available with the company. It was held that if interest free funds were sufficient to meet the investments made, in that case a presumption is established that the borrowed capital was used for the purpose of business and the interest expenditure is deductible under section 36(1)(iii) of the Act. The Tribunal held that the interest free fund available to the assessee is sufficient to meet its investment. It can be presumed that investments were made from interest free funds available with the assessee. This position clearly emerges from the record and for the current assessment year as well. There is no perversity when nothing contrary to the factual material was brought on record by the Revenue. Supreme Court’s decision: The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. In view of the above findings, we find no reason to interfere with the judgment of the High Court. NOTE: The controversy in relation to disallowance u/s 36(1)(iii) / 14A in relation to allowability of interest cost is long drawn. This Apex Court ruling upholds the principle of presumption of investment out of owned funds in a scenario where there is a mixed pool of funds and it is difficult to identify specific cost incurred in relation to interest-free advances / investments. It is pertinent to note that in the Apex Court ruling in the case of Maxopp Investment / Avon Cycles [2018] 402 ITR 640 (SC), the assessee had suo motu offered disallowance of interest cost before ITAT (where there were mixed pool of funds) by apportioning part of the interest cost towards investment. Supreme Court in that case had remarked that after applying the principle of apportionment, it did not find any merit in the appeal. No particular reference is made to the aforesaid decision in the instant case. However, it is relevant to note that Supreme Court, in its earlier rulings also, in the case of East […]

No disallowance u/s 36(1)(iii) / 14A where interest-free funds are sufficient to cover interest-free loans ...

Assessee, an employee of Infosys BPO Ltd, was granted ESOP options, of which 6000 options vide Option Transfer Agreement dated 07.02.2007 were transferred to/bought back by Infosys Technologies Ltd., with Infosys BPO Ltd., as a confirming party. 6000 options comprised of 1250 options granted on 28.02.2003; 2500 options granted on 02.02.2004 and 2250 options granted on 01.06.2005. The options granted on 28.02.2003 and 02.02.2004 were held for a period of more than 3 years before their transfer on 07.03.2007. For the AY 2007-08, the assessee filed his return of income declaring Long Term Capital Gains ('LTCG') arising on transfer of above 3750 ESOP options amounting to Rs. 20,41,672. Assessee's case was selected for scrutiny and the Assessing Officer ('AO') treated the said capital gains as Short Term Capital Gains ('STCG') instead of LTCG. The AO held that the options have no value without their exercise and the gains derived by the assessee by transfer thereof, essentially represents the exercise by the assessee of the rights that the options had rendered to him.

ESOP transfer (prior to exercise) chargeable to tax as capital gains – Bangalore ITAT

JSW Steel Limited v ACIT (ITA No.923/Bang/2009 dated 13.01.2017) (Mumbai ITAT) BACKGROUND: – Assessee had availed term loans from various Indian and foreign financial institutions and banks for setting up of integrated steel plants.  The assessee had utilized the above loans to pay the purchase price of the imported plant and machinery for setting up of the Steel plants. The loans were repayable over various maturity dates up to 2010. – After setting up the steel plants, the assessee had incurred huge loss due to economic recession in general and steel industry in particular and was under severe financial crisis. Accordingly, the assessee entered into a financial restructuring package. – After negotiations with the foreign lenders, the assessee entered into agreements to settle the dues, pursuant to which the principal and interest payable were reworked and part of the principal and interest amounts were waived. – Accordingly, the entire sum of was credited to the Profit and Loss account as an exceptional item on account of waiver of the principal and interest payable thereon with a specific note in ‘Notes to Account’ that the exceptional item represents waiver of dues on settlement. – During the course of assessment proceedings, the assessee contended that since the waiver of principal amount of borrowing was utilized on capital account, therefore, it is a capital receipt not taxable while computing the income of the assessee and hence the amount waived has not been offered to tax as per section 41(1). – Further, the assessee by way of a note in the computation gave a caveat that the amount of Rs.314.14 crores which represents capital receipt is not in the nature of profit and gains of business and therefore, is not includable in the book profit under section 115JB. – The Assessing Officer, however, while computing the book profit in the assessment order considered the figure as given in the profit & loss account and did not agree to reduce the aforesaid waiver of dues.

Capital Receipt / Waiver of loan [not chargeable to tax u/s 41(1)] to be excluded ...

The Union Budget for the fiscal year 2017-18 was presented by the Hon’ble Finance Minister on 1st February 2017. As in the past 2 budgets, the focus of our FM has been towards rationalisation of the provisions of the Income-tax Act, 1961 and to expand the tax base and curb on the tax evasion. While providing marginal relief by way of tax rate cuts to individuals and SMEs, the proposals laid down in this Budget primarily pivot around curtailing litigation on several issues by providing clarificatory & few retrospective amendments and providing impetus to several sectors of the economy. Direct tax proposals in the Finance Bill, 2017 are effective from the financial year commencing on 1 April 2017, unless otherwise specified. Click here to read the analysis of key direct tax proposals

Budget 2017 – An Insight on Key Direct Tax proposals