Mauritian entities have found it difficult to benefit from the capital gains tax exemption under the India- Mauritius double taxation avoidance agreement (DTAA) upon exit from Indian investments with the tax department questioning the said benefits. Recently, the Authority for Advance Ruling (AAR), declined to give a ruling on taxability of a Mauritian resident in India, on the grounds that the transaction was prima facie designed for avoidance of tax.[1]


Continue Reading AAR declines ruling to a Mauritius resident, alleging that transaction was designed to avoid tax

Provisions for taxing dividend income, receive yet another upgrade

The Finance Bill, 2020 (the “Bill”) was recently passed by the Lok Sabha (Lower house of the Parliament) on March 23, 2020, with more than 50 amendments to the Bill. The Bill has now received the presidential assent and has become an Act (“Finance Act”).  The new provisions proposed by the Bill, for taxing dividends have also been amended to expand the scope of certain benefits and to provide more clarity surrounding the applicability of these provisions. Through this blog, we would like to discuss changes pertaining to taxation of dividends.

Deduction for dividends received from foreign companies and business trust

As per the erstwhile section 115-O of the Income-tax Act,1961 (“IT Act”), distribution of dividends by a domestic company was subject to an additional income tax, called Dividend Distribution Tax (“DDT”), in the hands of the company at an effective rate of 20.56% (inclusive of the applicable surcharge and cess). Such tax was treated as the final tax on dividends and the dividends were generally exempt from any further incidence of tax in the hands of the investors. Further, in order to reduce the cascading effect of DDT, domestic companies while computing the amount of dividends on which DDT is paid were allowed a deduction for dividends received from its subsidiary (i.e. where the company holds more than 50% of the shareholding of the subsidiary), provided DDT was paid by the subsidiary during the same financial year. Similar deduction was also available on account of dividends received from a foreign company on which tax was payable by the domestic company under section 115BBD of the IT Act, provided the domestic company held at least 26% equity shareholding in the foreign company.
Continue Reading Provisions for taxing dividend income, receive yet another upgrade

Dividend Distribution Tax Abolishment - Here’s Something Lost in Translation

The government has said taxes on income received from dividends will now have to be paid by the shareholders instead of the dividend distributing company. The Finance Bill 2020 presented alongside the Union Budget on February 1, 2020 abolished the imposition of Dividend Distribution Tax (“DDT”) w.e.f. FY 2020-21. Over two decades ago, the Finance Act 1997 under Income Tax Act, 1961(“IT Act”), introduced DDT wherein the taxes on dividend were directed to a single point i.e. to be paid by the dividend distributing company and the incidence of tax shifted from the recipient to the payer. Doing away with this practice, the government has once again reverted to the pre DDT days. Present rate of DDT is @15% on gross basis plus surcharge and cess, resulting in net tax rate of 20.56%.
Continue Reading Dividend Distribution Tax Abolishment: Here’s Something Lost in Translation

claim of depreciation of assets and carry forward of expenditure by trusts

In a very recent judgment of Income Tax Appellate Tribunal, Delhi (ITAT) in DCIT(E) v. Smt. Angoori Devi Educational & Cultural Society (Angoori Devi),[1] two very important questions in relation to the taxation of trusts were discussed:

  1. Whether depreciation can be allowed on assets that were acquired out of contributions received, which were exempt from tax since the said expense was allowed as application of income in the past years under Section 11 of the Income Tax Act, 1961 (IT Act);
  2. Whether excess expenditure incurred by a trust in an earlier assessment year could be allowed to be set off against the income of the subsequent year, and in the event of delay in filing the return, whether such a carry forward can be disallowed under section 80 of the IT Act.


Continue Reading Delhi ITAT clarifies the issues around claim of depreciation of assets and carry forward of expenditure by trusts

Interest Paid on Convertible Debentures - Income Tax Law

The recent Income Tax Appellate Tribunal (ITAT) Order in CAE Flight Training (India) Pvt. Ltd. (TS-440-ITAT-2019 (Bang)) clarifies how Compulsorily Convertible Debentures (CCDs) are to be treated under Income Tax Laws.

Before delving into the Order and what the ITAT said in making it, it is important to understand the legal context in which this question arose in the first place. To do this, we first need to understand the nature of a CCD. A debenture is a debt-based security that may or may not be secured against the assets of the company. Although debentures are undisputedly debt instruments, CCDs are debentures that are mandatorily converted into equity according to pre-determined terms at a pre-defined time. In the pre-conversion stage, the CCD holder is considered as a debtor by the company and is required to be paid interest on its investment. Post-conversion, the debt becomes equity capital in the company, which results in such investor earning dividends from its holdings.
Continue Reading ITAT Puts On It’s Thin(king)-Cap – Treatment of Interest Paid on Compulsorily Convertible Debentures Under the Income Tax Laws

 

ITAT on the Taxability of Transfer of Know-how Under Development

Research and development (R&D) in all fields is a costly affair, but more so in bio-technology, where molecules are first evolved, developed and then subjected to arduous and expensive clinical trials. Till such time that the molecule reaches the final stage, it is simply work-in-progress (WIP), even though the idea and formulation are valuable.

Further development of the WIP is even more expensive and needs an even larger source of funding. To brave cash crunches and the inherent risk of uncertainty in R&D, a common and relevant modus operandi for many WIP technologies is to transfer such WIP into another group company or a joint venture company. Such transfer is intended to facilitate further fine-tuning of the WIP until eligible for commercial exploitation, through licensing, manufacturing, production or processing.
Continue Reading ITAT on the Taxability of Transfer of Know-how Under Development

 Are the Assets or monies distributed to retiring partners taxable

Disputes involving whether capital gains taxes are leviable on sums/assets paid to retiring partners has been a subject matter of litigation for several decades now. In order to bring clarity, the legislature introduced a new provision (i.e. section 45(4)) into the Income tax Act, 1961 (IT Act), which provided that capital gains tax should be levied in the hands of the partnership firm at the time of distribution of assets. This seems, however, to have further complicated the situation.

Bangalore Income Tax Appellate Tribunal (ITAT) in the case of Savitri Kudur[1] and the Madras High Court (HC) in the case of National Company[2] have delivered noteworthy decisions recently. The Bangalore ITAT held that the cash consideration paid to the retiring partner on the basis of the amount lying in his/her capital account would not be subject to capital gains tax under the IT Act by relying on the decision of the Supreme Court (SC) in the case of Mohanbhai Pamabhai[3]. The Madras HC, on the other hand, held that even the allotment of immovable properties to the retiring partners would not be subject to capital gains tax by relying on the same SC decision in the case of the Mohanbhai Pamabhai (supra).
Continue Reading Never-Ending Saga: Are the Assets/Monies Distributed to Retiring Partners Taxable?

dual residence tax for Non Residential Indians NRIs

The concept of dual residence crucially affects taxation of non-resident Indians and individuals who travel frequently between India and other countries. India follows a residence-based taxation system for residents, i.e., an Indian resident is taxed on his global income. A non-resident is taxed on income which is sourced or accrued or received in India.

However, the confusion arises when an individual leaves the country and starts residing in another country under the laws of which he also becomes a resident in that other country in that year. Thus, the individual may become a ‘dual resident’ for tax purposes. Taxation of dual residents is resolved either under local laws or when there is a Double Taxation Avoidance Agreement (DTAA) executed between the two jurisdictions of which they are residents, through application of the tie breaker clause in the DTAA.
Continue Reading The Dilemma of Dual Residence – Can Vital Interests Fluctuate Overnight?

cbdt direct tax

In the Chamber of Tax consultants & ors v. CBDT and Union of India)[1], the Hon’ble Bombay High Court (HC) set aside a portion of the Central Board of Direct Taxes’ (CBDT) action plan that sought to incentivise commissioners of income tax (Appeals) (CIT(A)) whose orders have led to enhanced tax demand from the tax payers. The HC noted that the proviso to the section 119 of the Income tax Act, 1961 (IT Act) specifically prohibits it from issuing any such directions to make a specific assessment or dispose a case in a particular manner.

Facts

Sometime back, the CBDT issued a Central Action Plan for the financial year 2018-19 (CAP) inter alia for the purposes of setting out targets for tax collection, fixing timelines for disposal of cases by income tax authorities and for awarding certain reward points for such disposals. However, since the said CAP proposed to incentivise CIT(A)s who were passing orders favouring the Government, it raised a huge issue and there were widespread protests against such a move.
Continue Reading Bombay High Court Sets Aside CBDT’s Proposal to Reward CIT(A)s for Pro Revenue Orders

Indian Supreme Court Rectifies Mistake and Grants Benefit of Tax

To attract investment, industrial activities and improve economic development ,in certain states such as Himachal Pradesh, Uttaranchal, Sikkim and the states in the North-East, the Central Government has introduced a time-bound tax holiday, deducting 100% profit for the first five years and 25% of profits in subsequent five years under section 80-IC of the Income-tax Act, 1961 (IT Act).

This tax holiday is available to enterprises that have set up new units or carried out substantial expansion of existing units within a specified period (different dates apply for different states and regions). The conditions for availing the holiday are that the unit should operate or commence production, or manufacture specified articles, in these special category states.
Continue Reading Supreme Court Rectifies Mistake and Grants Benefit of Tax Exemption