In an upsetting ruling, the Hyderabad ITAT in Vertex Projects LLP[1] has held that even in a court approved merger, the resulting company will have to pay taxes if the assets of the merging companies were transferred to it for less than fair market value.Continue Reading A Court Approved Merger could still be Subject to Tax
Income Tax
Section 79 cannot be invoked when there is no change in ultimate beneficial shareholding
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
Beneficial ownership test is not required under Indo-Mauritius tax treaty
Corporate entities have been invoking the provisions of the India-Mauritius tax treaty and using the infamous “Mauritius route” to avoid paying capital gains tax in India for a while now. This has been a sore subject for tax authorities in India.Continue Reading Beneficial ownership test is not required under Indo-Mauritius tax treaty
Shares under lock-in period valued as 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
SC delivers two landmark judgments on exemptions claimed by Charitable Institutions
The Hon’ble Supreme Court of India (“SC”) delivered two landmark decisions dealing with the conditions and entitlement of charitable institutions to claim exemption under the Income Tax Act, 1961 (“IT Act”), recently. While Ahmedabad Urban Development Authority,[1] (“AUDA”) dealt with the provisions and conditions of a charitable institution engaged in the activity of advancing an object of general public utility (“GPU”), New Noble Educational Society,[2] (“New Noble”) dealt with the issue of whether educational institutions can be engaged in other activities.Continue Reading SC delivers two landmark judgments on exemptions claimed by Charitable Institutions
Supreme Court holds that filing of declaration under Section 10B is mandatory
The Hon’ble Supreme Court (“SC”) recently in the case of Principal Commissioner of Income Tax-III, Bangalore and another Vs. M/s Wipro Limited[1] refused to allow the assessee i.e. Wipro Limited (“Assessee”), a 100% export oriented unit, to carry forward its losses under Section 72 of Income Tax Act, 1961 (“IT Act”) due to its failure to withdraw deduction (which was regarded as exemption) under Section 10B of IT Act within the prescribed timeline.Continue Reading Supreme Court holds that filing of declaration under Section 10B is mandatory
Supreme Court strikes down the old benami law as unconstitutional
In a major relief to all the parties accused of being involved in benami transactions, a three-judge bench of the Supreme Court in the case of Ganpati Dealcom Pvt. Ltd.[1] has quashed all prosecution and forfeiture proceedings pertaining to transactions entered into before October 25, 2016. The old benami law i.e. Benami Transactions Act of 1988 ( “Benami Act”) was amended on the said date by the Benami Transactions (Prohibition) Amendment Act, 2016 (“2016 Amendments”) and the Supreme Court declared Section 3 and Section 5, introduced through this amendment, as unconstitutional.Continue Reading Supreme Court strikes down the old benami law as unconstitutional
Registration as a charitable institution cannot be made subject to conditions not prescribed under the IT Act
Background
The Income Tax Act, 1961 (“IT Act”) prescribes a special taxation regime for charitable trusts and institutions which are registered under the said Act. Sections 11-13 of the IT Act enable the income of a charitable trust or institution to be exempt from tax, subject to the satisfaction of certain prescribed conditions. Before such exemption can be claimed, the charitable trust or institution needs to make an application before the Commissioner of Income Tax (“CIT”) or the Principal Commissioner of Income Tax (“PCIT”), seeking registration as a charitable trust or institution under the IT Act. The CIT or PCIT can then pass an order accepting or rejecting the application for registration.Continue Reading Registration as a charitable institution cannot be made subject to conditions not prescribed under the IT Act
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
Your Employee or Mine? – Determining Tax Implications on Hiring Foreign Employees from Related Foreign Entities
Multinational companies (“MNCs”), with a view to utilise available skill within the MNC group, often depute employees from a foreign entity to another entity of the same group. During the period of deputation, such employees often retain their employment with the original parent entity, typically to enjoy continued social security benefits. Employees under such arrangements (“Secondment Agreements”) are referred to as, inter alia, ‘seconded employees.’Continue Reading Your Employee or Mine? – Determining Tax Implications on Hiring Foreign Employees from Related Foreign Entities