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22.03.2018 - Voice of CA presents - Latest Updates
Thursday, March 22, 2018

  I. Headlines Today:   

  1. Provisions relating to appointment of Chairperson and Members of NFRA is effective from 21.03.2018  (Click for detail)
  2. Despite Supreme Court order, Aadhaar still mandatory for filing I-T returns  (Click for detail)
  3. Cabinet approves Modicare with budgetary support of Rs 160 bn for 2 years  (Click for detail)
  4. PNB blames concurrent auditor for not flagging off SWIFT transactions  (Click for detail)
  5. Parliament passes bill that lets govt double tax-free gratuity to Rs 20 lakh  (Click for detail)
  6. IRDAI: Linking Aadhaar with existing insurance policies is not mandatory  (Click for detail)
  7. SEBI issues risk management norms for commodity derivatives  (Click for detail)
  8. SEBI may impose trading curbs on Companies undergoing insolvency proceedings  (Click for detail)
  9. RBI updates master direction on ECBs, Trade Credit, Borrowing and Lending in foreign currency by dealers  (Click for detail)
  10. RBI updates master direction for reporting under FEMA Act, 1999  (Click for detail)
  II. Direct Taxes Case Laws: 

1.  Maxopp Investment Ltd. Vs Commissioner of Income Tax, Civil Appeal Nos. 104-109 of 2015 and others, Date of Judgment: 12.02.2018, Supreme Court of India

Whether, for the purpose of Section 14A of the Income Tax Act, 1961, the dominant or main object of purchasing shares and securities would be a relevant consideration in determining as to whether expenditure incurred is ‘in relation to’ the dividend income?

Held: No

Brief Facts:
The assessee is engaged, inter alia, in the business of finance, investment and dealing in shares and securities. The assessee holds shares/securities in two portfolios, viz. (a) as investment on capital account; and, (b) as trading assets for the purpose of acquiring and retaining control over investee group companies, particularly Max India Ltd. Any profit/loss arising on sale of shares/securities held as ‘investment’ is returned as income under the head ‘capital gains’, whereas profit/loss arising on sale of shares/securities held as ‘trading assets’ (i.e. held, inter alia, with the intention of acquiring, exercising and retaining control over investee group companies) has been regularly offered and assessed to tax as business income under the head ‘profits and gains of business or profession’. The assessee filed return for AY 2002-03, declaring income of Rs.78,90,430/-No part of the interest expenditure of Rs.1,16,21,168/- debited to the profit and loss account, to the extent relatable to investment in shares of Max India Limited was considered disallowable u/s 14A of the Act on the ground that shares in the said company were acquired for the purposes of retaining controlling interest and not with the motive of earning dividend. As such, dividend of Rs.49,90,860/- earned on shares of Max India Ltd. was only incidental to the holding of such shares.

The Hon’ble Apex Court held that:

i)    The dominant purpose for which investment in shares is made may not be relevant while interpreting Section 14A. This reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. Test of dominant intention as applied by the Punjab and Haryana High Court in Pr. CIT v. State Bank of Patiala (2017) 391 ITR 218 is discarded.

ii)   The P&H High Court in Pr. CIT v. State Bank of Patiala (supra) is correct in pointing out that CBDT Circular No. 18/2015 dated 02-11-2015 carves out a distinction between ‘stock-in-trade’ and ‘investment’ and provides that if the motive behind purchase and sale of shares is to earn profit, then the same would be treated as trading profit and if the object is to derive income by way of dividend then the profit would be said to have accrued from investment.

iii) Where shares are held as ‘stock-in-trade’, certain dividend is also earned, though incidentally, which is also an income. This triggers applicability of Section 14A which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in CIT Vs Walfort Share and Stock Brokers P Ltd. 326 ITR 1 (SC). Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned.

iv)   The AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.

v)  Rule 8D of the Rules is prospective in nature and could not have been made applicable in respect of the Assessment Years prior to 2007 when this Rule was inserted.

(Please click here for Judgment)


2. M/s. Abhipra Capital Ltd. Vs. DCIT (Inv.), I.T.A. No. 676/2005, Date of Decision: 15.02.2018, High Court of Delhi

Whether members’ fee of Rs.5 Lacs paid by the appellant to the National Stock Exchange was in the nature of a capital expenditure?

Held: Yes

Brief facts:
The appellant assessee was incorporated on 28th September, 1994 deals in shares in stock markets, merchant banking and other financial services. The appellant had paid Rs.5,00,000/- to the National Stock Exchange in A.Y. 1996-97 as a non-adjustable deposit for acquisition of membership. The appellant had treated the payment of Rs.5,00,000/- as revenue expenditure, which was not accepted by the Assessing Officer, who held that the payment was non-recurring in nature and had given rise to an enduring benefit, as it was the initial payment for membership of National Stock Exchange, without which the applicant could not be given membership. So, it would qualify as capital expenditure. He held that the aforesaid expenditure could be allowed as a deduction equal to 1/10th of the total expenditure, in 10 equal annual installments, and accordingly, Rs. 50,000/- was allowed as deduction and the balance amount of Rs.4,50,000/- was disallowed and added to the computation of income. The CIT(A) has deleted the addition on the ground that the appellant assessee had completed first year of business in the year ending 31st March, 1995, i.e. A.Y.1995- 96, and accordingly the year in question, i.e. 1996-97, was the second year of business. It was held that expenditure was for expansion of business in the same line. Rs. 5,00,000/- was like subscription fee paid to the National Stock Exchange, which should not be treated as capital expenditure. The hon’ble ITAT reversed the order of CIT(A). The appellant assessee, being aggrieved, filed an appeal before the Hon’ble High Court.

The Hon’ble Court held that a fixed sum of Rs.5,00,000/- was a one time payment and is not an annual subscription fee without payment of which, the appellant-assessee could not have acquired membership of NSE. On acquisition of membership, the appellant acquired right to trade in shares and act as a broker. It enabled the assessee to acquire an asset to earn income in that year and in future. Membership brought into existence an advantage for all times. Also, Rs 5,00,000/- represents money paid to procure a permanent right in the form of a license to carry on trade. Therefore, it was expenditure to bring business into existence. This expenditure would not be revenue but capital in nature. Further, the expenditure made was for acquiring and bringing into existence an asset or advantage of enduring benefit and not for running business to produce more profits. The expenditure incurred was for acquisition of property and rights of a permanent character. The enduring advantage was in the capital field.
Hence, the appeal was held against the assessee and in favour of the revenue.

(Please click here for Judgment)  

Golden Rules:

  "Truth" is like surgery, it hurts but it cures and
"Lie" Is like a pain killer, it gives relief but has its side effects later. 


Thanks & Regards


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