Karnataka HC affirms discount on issue of ESOPs is a tax-deductible business expenditure

Rewarding employees through share-based benefit schemes has been an effective tool for the companies to not just recognise their contribution to the company, but also retain them by imbibing a sense of belonging and ownership. One such scheme, popular among the companies for almost last two decades, has been grant of Employee Stock Option Plans (“ESOPs”). In simple terms, an ESOP is an option and not an obligation, provided by a company to its employees, to purchase its shares at a future date at a pre-determined price, which is ordinarily less than the market price, on satisfaction of certain prescribed conditions. While the issuance of ESOPs entail various tax implications for both the employer and the employees, the scope of this blog is limited to ascertaining the validity of an employer’s right to claim the perceived discount granted on the issue of shares as a tax deductible business expenditure. Recently, the Karnataka High Court (“HC”) affirmed the ruling of the special bench of the Bangalore Income Tax Appellate Tribunal (“ITAT SB”) in the case of Biocon Ltd.[1], wherein it was held that discount on issuance of ESOPs is an allowable business expenditure under Section 37(1) of the Income-tax Act, 1961 (“IT Act”) for the employer. Continue Reading Karnataka HC affirms discount on issue of ESOPs is a tax-deductible business expenditure

Foreign Pension Funds’ tax treatment to match Sovereign Funds for certain investments 

Background

With a view to boost infrastructure investments in India and make Indian investment more attractive, the Finance Act, 2020 (FA, 2020) introduced section 10(23FE) in the Income-tax Act, 1961 (IT Act). This section provides an exemption from tax in India in respect of income of certain specified investors who have investments in the infrastructure sector. Specified investors for this purpose include a wholly owned subsidiary of Abu Dhabi Investment Authority, ‘pension funds’ (PF) and ‘sovereign wealth funds’ (SWF). The exempt income would include interest, dividend or long-term capital gains arising to the specified investors, from their investments made in (a) company or entity engaged in developing, maintaining or operating an ‘infrastructure facility’ (Infra Companies); (b) Category-I and Category-II Alternate Investment Funds which have in turn made all their investments in Infra Companies; and (c) business trusts (i.e. Real Estate Investment Trusts and Infrastructure Investment Trusts). These exemptions are available if the Specified Investors meet certain conditions, including the requirement that they should be notified by the Indian Central Government in this regard. In pursuance to this, the Central Board of Direct Taxes (CBDT) has specified the procedure for the inclusion of PFs in the tax exemption notification. Continue Reading Foreign Pension Funds’ tax treatment to match Sovereign Funds for certain investments

By Hook or By Crook - When IT dept. sought to tax rights issue as unexplained cash credit but Tribunal refused

Background

In general, tax can only be levied on an amount, which falls within the meaning of the term ‘income’ or ‘deemed income’. Capital receipts are not taxable except where they are characterised as ‘income’ through specific provisions in the Income-tax Act, 1961 (“IT Act”). Thus, amounts received by way of share capital, whether the amount representing face value or premium, being capital receipt are not characterised as ‘income’ of a company, and therefore not taxed. However, it has been seen that this exemption under the law can be misused. A time-tested strategy aimed at laundering an individual’s unaccounted funds involves incorporation of sham entities with huge capital at premium, which in turn invests these funds in the individual’s legitimate businesses by way of subscription to shares at a premium. Section 68 (‘Cash Credits’) of the IT Act attempts to deter such practices by bringing to tax any sum found credited in the books of an assessee if the assessee offers no or unsatisfactory explanations on the nature and source of the credit. Continue Reading By Hook or By Crook: When IT dept. sought to tax rights issue as unexplained cash credit but Tribunal refused

Assessing Indian tax considerations for successful offshore listing of Indian companies

We have seen in the blog dated September 14, titled ‘Using SPAC Vehicles as a Means of Listing Outside India’, that special purpose acquisition companies (“SPAC”) are making a comeback for the purposes of listing of companies outside India.

As a follow up to the earlier blog, we will examine some feasible structures for offshore listing and their Indian tax considerations. This examination is intended to identify the relevant tax considerations and ensure that such a listing takes place with due regard to them.

Shares of Indian companies and of foreign companies, deriving substantial value from Indian assets, are regarded as capital assets situated in India. Any gains derived by any person, including a non-resident, from transfer of an Indian capital asset is regarded as income taxable in India. The term ‘transfer’ in this context is given a very wide meaning and it includes within its purview sale, exchange, relinquishment of the asset, extinguishment of any right in the capital asset, conversion of the capital asset into stock in trade, maturity or redemption of zero coupon bond, etc. We will limit ourselves here to the meaning of transfer in relation to shares and securities. The law also provides how the gains are to be computed when there is a transfer of shares. It is a settled law that where the mechanism to compute gains is not available, it is presumed that the legislature did not intend such a transfer to be subjected to tax. Continue Reading Assessing Indian tax considerations for successful offshore listing of Indian companies 

Tax And White-Collar Crimes - Corporate Strategies – Part 2

Introduction

COVID-19 has put an unexpected brake on the economy, resulting in loss of jobs, opportunities, income for businesses and reduced demand for many products, leading to reduced production capacity in many cases. This reduction could be a result of a variety of factors, ranging from paucity of funds, lack of availability of labour or due to strict lockdowns imposed by Governments, which has resulted in restriction on movement of raw materials and finished goods. All of these could potentially also lead to an increase in tax related white-collar crimes, as discussed in the first part of this series.

In Part 1 of the series, we gave an overview, analysing the regulatory framework put in place to check white-collar crimes such as tax evasion, money laundering and financial fraud. This article deals with corporate strategies that companies may consider for the purposes of mitigating risks arising out of the potential violation of law, while also discussing global practices put in place to curb tax avoidance and evasion. Here we shall also deal with the risk of liabilities of directors and key managerial personnel with respect to such white-collar crimes. Continue Reading Tax and White-collar crimes | Corporate Strategies – Part 2

Primacy of family settlements upheld

Family settlements and ensuing documentation have been a subject matter of litigation for various reasons. One such litigious issue is whether the documents pertaining to family settlements are required to be registered under the Registration Act, 1908 (“Act”). If a document, which was otherwise required to be compulsorily registered, has not been registered, then as per Section 49 of the Act, such document would not affect any immovable property comprised therein, or confer any power to adopt, or be received as an admissible evidence of any transaction recorded in the document. The consequential issue that has evolved is whether the documents recording family arrangements are required to be registered. Recently, the Supreme Court (“SC”), in the case of Ravinder Kaur Grewal & Others. v. Manjit Kaur & Ors.,[1] has held that a memorandum of family settlement, which merely records the terms of a family settlement already acted upon by the concerned parties, is not required to be registered. Continue Reading Primacy of Family Settlements Upheld

“Heads I win, tails you lose” approach of tax authorities rejected by Kolkata ITAT bench

In its recent ruling[1], Kolkata bench of Income Tax Appellate Tribunal (“ITAT”) rejected the retrospective application of General Anti-Avoidance Rule (“GAAR”) on a scheme of amalgamation approved by the Punjab & Haryana High Court (“HC”) and Delhi HC.

Background

M/s. JCT Limited (“Assessee”) is a public limited company, engaged in the business of manufacturing, sale and export of textiles, nylon and different varieties of yarns. M/s Gupta and Syal Ltd. (“Subsidiary”) was a wholly-owned subsidiary of the Assessee. During Assessment Year (“AY”) 2011-12, the business of the Subsidiary was amalgamated with the Assessee by a scheme of amalgamation approved by the Punjab & Haryana HC as well as the Delhi HC. Prior to the amalgamation, the Subsidiary had no substantial business activity and the only income earned by the Subsidiary in that financial year was in the nature of rent and receipts from sale of a land. Upon amalgamation, the long-term capital gains (“LTCG”) from the sale of land of the Subsidiary were set off against the losses and unabsorbed depreciation of the Assessee for AY2011-12. Continue Reading “Heads I win, tails you lose” approach of tax authorities rejected by Kolkata ITAT bench

Clarity on eligibility criteria for funds set up by Category I FPIs for exemption from taxable presence in India

Background

A special  taxation regime, provided under Section 9A of the Income-tax Act, 1961 (“IT Act”), exempts eligible offshore funds, with their fund managers located in India, from treating them as having taxable business presence in India. On satisfaction of the requirements set out in Section 9A of the IT Act, management of the funds through such Indian fund managers would not constitute the offshore fund’s ‘business connection’ in India. It is important to note that when an offshore fund, satisfying these conditions is not taxable in India on its business income under the domestic law, then the question of it not having permanent establishment under the applicable double taxation avoidance agreement (“DTAA”) becomes moot. Additionally, Section 9A also excludes an eligible investment fund from being treated as resident in India for tax purposes under the provision of ‘Place of Effective Management’ when the eligible fund manager undertakes fund management activities while situated in India. Continue Reading Clarity on eligibility criteria for funds set up by Category I FPIs for exemption from taxable presence in India

CBDT NOTIFIES RELAXATION IN FAIR VALUATION NORMS- ARE THEY ENOUGH

 

Income-tax Act, 1961 (“IT Act”) provides for certain anti-avoidance provisions, like Section 56(2)(x) and Section 50CA, which seek to impose tax on certain assets, that were received or transferred for an inadequate consideration. Section 56(2)(x) of the IT Act stipulates that where certain assets, including shares and securities are received for a value which is less than their fair market value (“FMV”), then the difference between the FMV and actual consideration paid would be subject to tax in the hands of the recipient under the ‘other incomes’ head. Similarly, in the hands of the seller / transferor, Section 50CA provides for deeming the FMV of unquoted shares as the sale consideration for computing the capital gains arising from the transfer of such shares at a value which is less than the FMV. Continue Reading CBDT NOTIFIES RELAXATION IN FAIR VALUATION NORMS- ARE THEY ENOUGH?

In its recent ruling[1], the Income Tax Appellate Tribunal Bench at Delhi (ITAT) has reiterated the well-established principles, including (i) validity of Trusts; (iii) use of Trusts to hold treasury shares[2]; and (iii) the taxation of its income as a representative of the beneficiary/beneficiaries under the provisions of sections 160-166 of the Income-Tax Act, 1961 (IT Act). The ITAT further upheld the principle that trustees are to be assessed as ‘representative assessee’ in the same and like manner as beneficiaries and therefore, creation of a Trust is not a tax evasion device as the Trust will have the same tax liability and exemptions accruing to the beneficiary.

Continue Reading Trust is Trustworthy, not a Device to Evade Tax: ITAT Delhi