Photo of Bipluv Jhingan

Principal Associate in the Tax Practice at the Mumbai office of Cyril Amarchand Mangaldas. Bipluv specialises in various aspects of direct tax such as corporate tax, restructuring, and funds. He can be reached at bipluv.jhingan@cyrilshroff.com

Introduction

The intricacies of tax law often unfold through nuanced interpretations and amendments aimed at addressing loopholes. One such facet is the taxation of capital contributions by partners in partnership firms (including limited liability partnerships), as delineated under section 45(3) of the Income-tax Act, 1961 (“IT Act”). This provision deals with taxing transactions

Background

The Income-tax Act, 1961 (“IT Act”) contains various machinery provisions which enable tax authorities to recover tax dues from taxpayers. When payments are made to non-residents that are chargeable to tax under the IT Act, payers (both resident and non-resident) are obligated to withhold tax at applicable rates prior to remittance of funds. Typically, no such obligation arises if the payments are not subject to tax in India. Thus, there are times when taxpayers don’t withhold tax on payments, believing they should not be subject to tax under the IT Act. However, if the Indian tax authorities take a different view, they may initiate proceedings under section 201 of the IT Act against such taxpayers, i.e., the person responsible for withholding taxes.Continue Reading Orders for default in withholding tax on payments made to non-residents must be passed in a reasonable time

Income Tax Act

Background

The Income Tax Act, 1961 (“IT Act”), allows certain taxpayers to carry forward and set off the losses incurred in a financial year (“FY”)against the income of subsequent FYs, on satisfaction of prescribed conditions. However, to ensure taxpayers do not use such beneficial provisions to escape their tax liabilities, the IT Act also includes anti-abuse provisions, which disallow carry forward or set off of such losses under specified circumstances. In this respect, section 79 of the IT Act disallows a closely held company from carrying forward and setting off its tax losses if there is a change in the beneficial ownership of shares carrying more than 49% of the voting power of the company as compared to the year in which the loss was incurred (subject to certain exceptions). This provision was introduced with the intent to curb the practice of profitable enterprises acquiring loss making undertakings for the sole reason of utilising tax losses accumulated by such undertakings to reduce their taxable business profits.Continue Reading Section 79 cannot be invoked when there is no change in ultimate beneficial shareholding

unquoted shares

Background

In order to ensure income does not escape assessment, anti-abuse provisions under the Indian Income-tax Act, 1961 (“IT Act”) have been strengthened through multiple amendments. The Finance Act, 2017 introduced two such provisions to the IT Act, i.e., sections 56(2)(x) and 50CA, to bring under the scope of tax any notional gain that arises when shares[1] of a company are transferred for a consideration less than their the fair market value (“FMV”). This was followed by the introduction of a computation mechanism[2] to determine the FMV of the shares being transferred.Continue Reading Shares under lock-in period valued as unquoted shares

Beneficial ownership requirement not in-built in Capital Gains Article

Background

Historically, the Indo-Mauritius tax treaty has exempted capital gains arising to Mauritian investors from sale of shares of Indian companies, from being taxed in India. As a result, many investors used to structure their investments in India through entities incorporated in Mauritius, to claim this treaty benefit. This prompted the Indian tax authorities to renegotiate its tax treaty with Mauritius (and other countries), to, inter alia, acquire the right to tax capital gains arising from sale of shares of Indian companies and to introduce a limitation of benefits (“LOB”) clause, which excluded any shell/conduit company to claim certain benefits under the Indo-Mauritius tax treaty.

Even prior to such amendments, courts have denied the capital gain exemption under the Indo-Mauritius tax treaty to entities that were mere shell companies incorporated in Mauritius for the sole purpose of treaty shopping[1]. Recently, a similar question arose before the Mumbai Income-tax Appellate Authority (“ITAT”) in Blackstone FP,[2] where investments in Indian shares had been made prior to the amendment of the Indo-Mauritius tax treaty.Continue Reading Beneficial ownership requirement not in-built in Capital Gains Article

IT Act

Background

The Income Tax Act, 1961 (“IT Act”) confers various powers on the Income Tax Department (“ITD”) to curb the menace of laundering of unaccounted money. One such power-bestowing provision is Section 68 of the IT Act, which is often resorted to by the ITD when large amounts of unaccounted funds are invested in companies at a significant premium. This provision puts the onus on the taxpayer, i.e., the investee company, to satisfactorily explain the source of those funds and produce details to evidence the identity, genuineness and creditworthiness of the shareholders as well as the source of the shareholders’ fund.Continue Reading Is regulatory compliance sufficient to discharge onus u/s 68 of the IT Act?

Gift of ‘Brand’ to family trust not taxable

Family trusts have become a widely popular tool for not only succession and estate planning, but also for managing assets and investments. If deployed wisely, these trusts can prove to be an effective and tax efficient structuring instrument. However, despite the advantages offered by these family trusts, contributing or settling existing assets into such trusts may pose some challenges, especially on account of certain tax provisions. One such challenge is posed by the provisions of Section 56(2)(x) of the Indian Income-tax Act, 1961 (“IT Act”), which seeks to tax a notional income, where certain assets (such as land, securities, work of art, etc.) are transferred or settled/ contributed into a trust for no consideration or for a consideration less than the fair market value of such assets. (exempts transfer or contribution to a trust settled by an individual for the sole benefit of his/ her relatives). Recently, a similar issue came before the Mumbai ITAT, in the case of Balaji Trust[1], where the tax authorities sought to tax the gift of ‘Essar’ brand to a family trust.Continue Reading Gift of ‘Brand’ to family trust not taxable

Tax motivated transaction IPSO Facto may not be regarded as Sham

In today’s economy, a business entity cannot undermine the impact of taxation on its growth and development trajectory, which is why tax planning is considered to be the most pivotal part of financial planning. While the line between tax planning and tax evasion is very thin, the Supreme Court, on various occasions, has differentiated between the two concepts and has repeatedly held that minimisation of tax liability through legitimate tax planning is not illegal.[1]Continue Reading Tax motivated transaction ipso facto may not be regarded as sham

Applicability of new TDS provisions on sale of securities

Generally, transactions involving sale of shares by non-resident shareholders are subject to withholding tax at applicable rates under the Income-tax Act, 1961 (“IT Act”), provided the gains arising from such sales are taxable in India. However, there was no requirement to withhold/ deduct any tax on gains arising to resident sellers from sale of shares/ securities.
Continue Reading Decoding the applicability of new TDS provisions on sale of securities

 BUMPY ROAD AHEAD FOR M&A TRANSACTION - BUDGET 2021

The Finance Minister (“FM”) introduced her promised ‘never like before Budget’, with the objective of stimulating economic growth through higher spending on healthcare and infrastructure, against the backdrop of the economic slowdown caused by the Covid-19 pandemic. The FM has also proposed a slew of reforms under the Finance Bill, 2021 (“Bill”), to rationalize the extant provisions of the Income-tax Act, 1961 (“IT Act”). Certain proposals introduced in the Bill could significantly impact M&A deals and change the traditional modus operandi of M&A transactions in India. The ensuing paragraphs will focus on a few such significant amendments proposed in the Bill, which may require close consideration by stakeholders before entering an M&A transaction, be it amalgamation, share acquisition or an acquisition of business as a going concern.
Continue Reading Bumpy Road Ahead for M&A Transaction: Budget 2021