The Income Tax Act, 1961 (IT Act) contains several special beneficial provisions that allow for deductions in order to promote certain activities. One such provision is Section 10A of the IT Act, which seeks to promote and boost new business undertakings situated in free trade zones by providing suitable deductions. It provides for a 100 percent deduction of profits and gains derived by undertakings engaged in export of articles or computer software. The deduction is available for ten assessment years from the year in which the entity commences operations. These profits are to be determined based on the ratio of export turnover to the total turnover of the undertaking.

Over the years, there have been several disputes over the manner in which this ratio is to be determined. This is largely because while the term ‘export turnover’ has been defined under Section 10A of the IT Act, “total turnover” has not. In other words, there is no explicit provision that allows the taxpayer to exclude amounts from total turnover in case such amounts have already been excluded from export turnover.

In the recent case of CIT v HCL Technologies Limited[1], the Supreme Court of India dealt with this issue and provided much needed clarity on the subject.

Continue Reading Expenses Excluded from Export Turnover, also to be Excluded from Total Turnover

Stock Appreciation Rights (SARs) are recognised globally as one of the most popular instruments of stock-based compensation. SARs are alternatives adopted for implementing equity-based compensation plans like an employee stock option or employee stock purchase. SARs can be structured as either ‘equity settled’ or ‘cash settled’. As a concept, SARs contemplate passing on of appreciation in the value of a certain number of equity shares to employees.

The Income Tax Act, 1961 (IT Act) did not have any specific provision to tax such income; specific provisions were introduced in 1999 to provide for taxation of benefits provided by an employer to its employees under share benefit rewards. From 1999 onwards, Section 17(2) of the IT Act specifies the payments that come within the ambit of ‘salary’ and ‘perquisites’, and covers benefits available to employees therefrom.

For the period prior to 1999, the issue of taxability of amounts received from various employee benefit programmes, including amounts received from the redemption of SARs, was always under dispute. The special bench of the Mumbai Income Tax Appellate Tribunal (ITAT) in the case of Sumit Bhattacharya[1] held that the amount received on redemption of SARs should be taxable as salary because it was an employment related benefit, in the nature of deferred wages, bonuses or incentives received as a fruit of employment. However, the issue remained inconclusive and litigious. The Supreme Court (SC) appears to have settled this issue in the case of Bharat V. Patel[2], wherein it has been held that the amount received on account of SARs redemption prior to amendment to section 17(2) would not be taxed as salaries.

Continue Reading SC Holds that Income from SARs is Taxed as Capital Gains Only

The constitution validity of Entry Tax has faced a series of challenges. It was hoped that once the constitutional bench took control of the matter, the controversy would be resolved once for all. However, even after the constitutionality of the levy of Entry Tax per se was upheld by the majority of a nine judge bench of the Hon’ble Supreme Court (SC) in the case of Jindal Stainless Steel v. State of Haryana, Civil Appeal No. 3453/2002 (Jindal Case), the impending disputes weren’t put to rest.

The SC in the Jindal Case opined that non-discriminatory taxes do not interfere in the free movement of goods across the territory of India and therefore levy of Entry Tax by states does not violate Article 301 of the Constitution of India. The SC also laid down certain touchstones to be considered while analysing whether a levy is discriminatory against goods coming from outside the state vis-a-vis goods produced locally in the said state.

However, it directed the respective benches to adjudicate the question of the constitutional validity of each state’s Entry Tax legislation. Accordingly, the bench left important ancillary issues, which are relevant for deciding the validity of state specific Entry Tax legislation, open for determination, namely: (a) whether states have the right to tax imports from outside India; and (b) whether the entire state can be notified as a ‘local area’.

Continue Reading Entry Tax – The Quandary Continues…

One of the most widely litigated issues in India is the disallowance of expenditure incurred on earning income that is exempt from tax. In an endeavor to put the controversy to rest, the Supreme Court (“SC”) in the recent case of Godrej & Boyce Manufacturing Company Ltd. v. DCIT,[1] has held that expenditure should be disallowed if it is incurred in connection with the earning of tax-exempt income.

Facts

Godrej & Boyce Manufacturing Company Limited (“Taxpayer”) is engaged in the business of manufacture of steel furniture, electrical equipments, etc. It is also a promoter of various other companies and invests funds into these companies to maintain control over them.

Continue Reading Clearing the Air: SC Confirms Disallowance of Expenses Pertaining to Exempt Income

The Hon’ble Supreme Court of India (SC), in the recent case of Steel Authorities of India Ltd.[i], considered the question of admissibility of an appeal, against an order of the Central Excise and Service Tax Appellate Tribunal (CESTAT), filed before the SC under Section 130E(b) of the Customs Act, 1962 (Customs Act).

The SC analysed the provisions pertaining to the appellate mechanism laid down under the Customs Act juxtaposed with the role of the SC and its appellate powers, as envisaged under the Constitution of India (Constitution). It concluded that the appellate powers of the SC in relation to appeals filed against orders of the CESTAT are no different from the said powers of SC in case of an appeal against a judgment/ order of the High Court (HC).

Interestingly however, the SC laid down a non-exhaustive list of conditions for determining the admissibility of appeals, against an order of the CESTAT filed before it. They were as follows:

Continue Reading Appeal to the Supreme Court: Rights of Admission Reserved