J B Nagar CPE Study Circle Andheri E

J. B. Nagar CPE Study Circle Andheri (E) – September 2, 2012 Issues in Tax Audit Presented by: Yogesh A. Thar Chartered Accountant Tuesday, June 8, 2021 Yogesh A. Thar. 1

Clause 4: Status • Status of trusts formed as SPVs for realising Non Performing Assets acquired from Banks by issue of SR to the beneficiaries • Status of trusts formed as SPVs for acquiring Standard Assets from Banks by issue of PTCs to the beneficiaries • Trusts held as “individual” and not necessarily AOP. Tuesday, June 8, 2021 Yogesh A. Thar. 2

Clause 8: Nature of Business • “money lending” – if interest is to be taxed as “business income” or unrealisable advance is to be claimed as a bad debt. • Also if Exp to S. 73 or S. 2(22)(e) is an issue. • “renting of immovable property” – if rental income is to be offered as “business income”. Tuesday, June 8, 2021 Yogesh A. Thar. 3

Clause 12: Section 145 A • Excise Duty on finished goods: not “incurred”. Hence not to be added to the closing stock value u/s. 145 A – Loknete Balasaheb Desai SSL Ltd. 339 ITR 288 (Bom) • Q: If not incurred, can there be a debit to the P&L a/c. ? • If the P&L a/c is debited, can the stock be valued without considering such debit ? • If P&L is debited, can the duty be allowed if paid before the due date of ROI ? Tuesday, June 8, 2021 Yogesh A. Thar. 4

Clause 14: Section-32 -Depreciation Non- compete rights are an “intangible asset” eligible for depreciation. • In favour: – ACIT V. GE Plastics India Ltd. (Ahd. )(Trib. ) – ITO V. Medicorp Technologies India Ltd. 506)(Chennai)(Trib. ) – ACIT V. Real Image Tech. (P. ) Ltd. (Chn. )(Trib. ) – Tecumseh India (P. ) Ltd. V. ADIT (SB) (30 SOT • Against: – Paper Products Ltd. V. ACIT (Mum)(Trib. ) – Sharp Business Systems India Ltd. V. DCIT (Del. )(Trib. ) – Srivatsan Surveyors (P. ) Ltd. V. ITO (32 SOT 268) (Chn. )(Trib. ) Tuesday, June 8, 2021 Yogesh A. Thar. 5

Clause 14: Section-32 -Depreciation (cont’d) • Favour: – Recent Supreme Court decision holding that depreciation is allowable on goodwill arising on amalgamation – B. Raveendran Pillai V. CIT (Ker. )(HC) – CIT V. Hindustan Coca cola Beverages Pvt. Ltd (Del. )(HC); • Against: – Toyo Engineering (TS-361 -ITAT-2012)(Mum) • distinguished the Delhi HC ruling in Coca Cola disallowing the assessee's claim for depreciation on goodwill. – Metrex Technologies Ltd [TS-495 -ITAT-2012(CHNY)] • In the absence of specific valuation of assets / liabilities and goodwill, the latter was only a book entry and did not represent any commercial right. Tuesday, June 8, 2021 Yogesh A. Thar. 6

Clause 14: Section-32 -Depreciation (cont’d) • WDV of assets acquired in amalgamation includes unabsorbed depreciation in the hands of amalgamating company. • Explanation 3 to Sec. 43(6) providing unabsorbed depreciation as deemed to be ‘actually allowed’ not applicable. • View taken in: – CIT V. Hindutan Petroleum Corp. Ltd. (Bom. )(HC) – M/s. EID Parry (India) Limited (TS-530 -HC-2012)(MAD)(HC) Tuesday, June 8, 2021 Yogesh A. Thar. 7

Clause 16(b): Employee Contribution • ESI of the employees of the contractor deducted from salary, whether income u/s. 2(24)(x)? – S. 2(24)(x) – sum received by the assessee from “his employees” – Assessee is the ‘principal employer’. Contractor is the ‘immediate employer’ – PE liable if IE has no independent code no. – Deeming fiction under ESI law cannot be extended to IT Act. Tuesday, June 8, 2021 Yogesh A. Thar. 8

Clause 17(a)/(e): Capital Expenditure • Business expenditure- Lease premium- Allowable if in the nature of advance rent. Else, capital expenditure. – – Krishak Bharati Cooperative Ltd. v. ACIT (Delhi)(High Court) CIT V. HMT Ltd. (67 Taxman 506) JCIT V. Mukund Ltd. (106 ITD 231) DCIT V. Sun Pharmaceutical Ind. Ltd. (227 CTR 206) • Pharma Companies – Gift to Doctors – whether offense or prohibited by law? Proviso to sec. 37 applies? – Recent circular of CBDT – Indian Medical Council’s Regulations applicable to Doctors. Not to Pharma Companies. Tuesday, June 8, 2021 Yogesh A. Thar. 9

Clause 17(f): Disallowance u/s 40(a) • Short deduction of TDS not disallowable – DCIT v. Chandabhoy & Jassobhoy 49 SOT 448 (Mum) – DCIT v. S. K. Tekriwak 48 SOT 515 (Kol) • Disallowance limited only to amounts “payable” and not that are actually paid during the year – Merilyn Shipping & Transport ITA 477/Viz/2008 • Foreign income tax: not disallowable u/s. 40(a)(ii) – “tax” definition in S. 2(43) – “this Act” Tuesday, June 8, 2021 Yogesh A. Thar. 10

Clause 17(k): Contingent liability • Business expenditure- ESOP / Sweat Equity – CIT v. PVP Ventures Limited (Mad. )(High Court) – once option is exercised, the liability gets ascertained and cannot be disallowed as contingent. – ACIT v. Spray Engineering Devices Ltd (Chandigarh)(Trib) – liability towards sweat equity is ascertained liability on the date of passing the resolution. Mere non allotment does not render the same as contingent. Tuesday, June 8, 2021 Yogesh A. Thar. 11

Clause 17(l): Section-14 A • CIT V. Delite Enterprises ITA 110/09 (Bom)(HC): – S. 14 A: Business expenditure-Disallowance-Exempt Income-Tax free investments-Disallowance under section 14 A cannot be made if tax-free investments capable of taxable income. – Further, as no taxable income was actually earned by the assessee, disallowance u/s 14 A was not sustainable. • Avshesh Mercantile P. Ltd v. DCIT ITA 5779/Mum/2006 ( Mum. )(Trib) Tuesday, June 8, 2021 Yogesh A. Thar. 12

Clause 17(l): Section-14 A (cont’d) • Shares held as stock-in-trade, whether 14 A applies? – Indian Bank’s case 56 ITR (SC) – CCI Ltd. v. JCIT ITA 359/2011 dt 28. 2. 12 – Yatish Trading Co. v. ACIT 129 ITD 237 (Mum) – JCIT v. American Express Bank Ltd. (Mum-Trib). ITA 5904/M/2000 dt. 8. 8. 12. • 339 ITR 296 (Ker) and 117 ITD 169 (SB) considered • CCI – not considered Tuesday, June 8, 2021 Yogesh A. Thar. 13

Clause 17(l): Section-14 A (cont’d) • Mixed Funds theory – Reliance Utilities case 178 Taxman 135 (Bom) – HDFC Bank ITA 4529/M/2005 dt 29. 6. 2011 – Shopper’s Stop ITA 1448/M/10 dt 30. 8. 2011 Tuesday, June 8, 2021 Yogesh A. Thar. 14

Clause 21: Section 43 B • CIT v. Hindustan Latex Ltd (Ker. ) ( High Court) : – Deductions on actual payment-Business expenditure. Constitutional validity-Section 43 B(f), which allows deduction for leave encashment only on payment basis is ultra vires. In any event, it does not cover premium paid to insurer. (S. 37 (1), Constitution of India Art 226 ) • Also See: – Exide Industries Ltd vs. Union of India 292 ITR 470 (Kolkata High Court ) – Exide Industries Ltd vs. Union of India (SC) Tuesday, June 8, 2021 Yogesh A. Thar. 15

Clause 21: Section 43 B (cont’d) • Exgratia / good work reward – whether “bonus” and hence liable for disallowance u/s. 43 B if unpaid till due date? – CIT v. Autopins (India) 192 ITR 161 (Del) – Shriram Pistons v. CIT 307 ITR 363 (Del) • Interest payable: Whether foreign banks are “scheduled banks” ? – Some are Scheduled Banks. But not foreign branches. RBI Act applies only to India. Tuesday, June 8, 2021 Yogesh A. Thar. 16

Clause 25: B/F Depreciation • Unabsorbed depreciation of the years 1997 -98 to 2001 -02 allowed indefinitely – General Motors India P. Ltd. V. DCIT Special Civil Application No. 1773 of 2012. Order dt 23. 8. 12 • Cir. 14 of 2001 interpreted – Special Bench decision in Times Guarantee’s case was Against the Assessee. Tuesday, June 8, 2021 Yogesh A. Thar. 17

Clause 27: TDS • TDS u/s. 194 -I not attracted on mere reimbursement of rent to holding company as there is no lessor- lessee relationship. – Result Services Pvt. Ltd [TS-473 -ITAT- 2012(DEL)]: • Holding company as lessee paid rent directly to landlords after deducting tax u/s 194 -I. No lessor-lessee relationship between assessee and holding company Tuesday, June 8, 2021 Yogesh A. Thar. 18

Miscellaneous Issues • Clause 29 – whether cost audit was carried out? Companies (Cost Accounting) Rules, 2011. What if cost audit was required but was not carried out? • Effect of revision in Schedule VI. – E. g. Secured Loans due within 1 year – where to be shown in Annexure I? – Quantitative details? • S. 44 AB compliance is required only qua business and not qua other income. Ghai Constructions case 184 Taxman 52 (Bom) Tuesday, June 8, 2021 Yogesh A. Thar. 19

Miscellaneous Issues (cont’d) • Clause 18: Whether second tier subsidiary is covered u/s. 40 A(2)(b)? • Clause 20: Whether loan write back is chargeable to tax u/s. 41(1)? – Loans used for capex; – Loans used for trading expenses • Clause 25(b): If the company was a closely held company in the year of loss but became a widely held company as a result of change in shareholding, will section 79 apply? Tuesday, June 8, 2021 Yogesh A. Thar. 20

Thank you