Golden Jubilee Residential Refresher Course (GJRRC) Case Studies on International Taxation (including Royalty & Capital Gains) Pinakin Desai 20 January 2017
Case study 1: Monetising demonetisation: Section 115BBE
Monetising demonetisation: Section 115BBE Section 115BBE: ► Total income of taxpayer consisting of income referred u/s 68, 69 to 69D, whether reflected in return of income or not, taxable @ 60% ► In addition to tax @ 60%, surcharge (25% of tax) and cess (3% of tax and surcharge), totaling to 77.25%. (Refer sixth proviso to section 2(9) of Finance Act 2016) ► No deduction for expenditure, allowance or set off of loss ► Section not restricted to cash deposits made between 8 November 2016 and 30 December 2016 ► Provisions are effective from Assessment Year 2017-18 as an ongoing provision. Section 271AAC: ► In addition to tax payable u/s 115BBE, penalty “may be” leviable @ 10% of tax amount (6% of income) ► No penalty if and taxes are duly paid @ 60%+SC+EC before end of previous year and income declared in ROI However, no immunity even if income is included in ROI1 and taxes paid as SA tax ► ► No penalty u/s 270A, if penalty is leviable u/s 271AAC (S. 270A(2)) ► Penalty is discretionary as section uses the term ‘may’ ► AO to grant opportunity for levying the penalty (Section 274) 1 If income is offered to tax, penalty may not be leviable u/s 270A of ITA. Case Studies on International Taxation (including Royalty & Capital Gains) 20 January 2017 slide 3
Monetising demonetisation: Section 115BBE Scrap Sale: ► Onus on taxpayer to substantiate that amount is received from scrap sale ► Where scrap is over and above the normal level, taxpayer may need to provide reasons for the same. ► In case where scrap is generated during the production, taxpayer may relate the same with excise returns. ► Unexplained amount ‘may’ be charged u/s 68 Deposit of High Denomination Notes: ► Addition to income only if source remains unexplained. ► Onus on taxpayer to provide proof of sufficient cash balance ► Taxpayer’s claim supported by evidence, no case for to income. Loan receipt: ► Heavy onus on taxpayer to prove genuineness of transaction when lender is a close relative ► Non co-operation of lender during the assessment proceedings may be a negative factor Case Studies on International Taxation (including Royalty & Capital Gains) 20 January 2017 slide 4
Monetising demonetisation: Section 115BBE Amount represented by cash sales: ► Onus on taxpayer to prove that amount represented by cash sales ► AO can verify the correctness of transaction by checking regular trend of business in past, invoices, purchase and sale of goods verified with inventory records etc. ► Mere non maintenance of address of buyer may not be sufficient for making additions. ► Taxpayer to maintain PAN of taxpayer if value cash sales (per transaction) exceeds INR 2 lakhs Failure to collect PAN may call for levy of penalty u/s 272B of Rs. 10,000 ► Failure to report cash sales > 2 lakhs may call for penalty u/s 271FA of Rs. 100 for every day ► where failure continues. Difference in value of building based on DVO report: ► AO may make reference to DVO without rejecting book u/s 142A ► No addition merely based on DVO report in absence of cogent evidence ► Addition justified u/s 69B if based on cogent evidence. Case Studies on International Taxation (including Royalty & Capital Gains) 20 January 2017 slide 5
Monetising demonetisation: Section 115BBE Discrepancy in stock statement submitted to bank: ► Alternative 1: Stock reported to bank did not exist and was fictitious Onus on taxpayer to prove that stock did not exist and was inflated to obtain higher credit facilities ► In absence of any evidence with taxpayer, AO may include in total income of taxpayer u/s 69 of ► ITA Tax Authority and Court may not accept the claim of taxpayer that stock did not exist as authorities ► may not recognize sub standard morality of taxpayer [Refer, Coimbatore Spinning and Weaving (95 ITR 375)(Mad)] ► Alternative 2: Reported correct stock to bank but by over stating consumption in ROI Taxable as business income ► Liable to levy penalty u/s 270A ► ► Alternative 3: Excess reported stock acquired out of unexplained source If source of funds not explainable addition may be justified u/s 69 ► Income taxable @ 60% u/s 115BBE ► Case Studies on International Taxation (including Royalty & Capital Gains) 20 January 2017 slide 6
Case study 2: Fair value of shares issued by a company: S. 56(2)(viib)
Fair value of shares issued by a company: S. 56(2)(viib) Apr 14 Subscription to 10,000 shares at par (Rs. 10) by the promoters of Rs. 1 Lakh 2014-16 Development of IP technology July 16 Contribution of Rs. 10L by unrelated domestic investor (1000 shares of Rs. 10 issued at premium of Rs. 990) Jan 17 Subscription of Rs. 10L of CCD by S of par value of 100 at premium of 400 basis internal DCF valuation of share at Rs. 500 (Rs. 10 L). Mar 17 Better technology development by the competitor Mar 17 Founder promoters lost hope in future of the company Apr 17 Conversion of CCD into equity (1:1) at the insistence of new buyer Apr 17 Transfer of all shares to competitor at Rs. 200 Case Studies on International Taxation (including Royalty & Capital Gains) 20 January 2017 slide 8
Fair value of shares issued by a company: S. 56(2)(viib) ► S. 56(2)(viib) taxes CHC in respect of excess consideration received for issue of shares from residents (other than VCU) ► Tax u/s. 56(2)(viib) = aggregate consideration received (minus) FMV of sharesDate Chronology ► R.W. Rule 11UA, FMV of shares at the option of company is higher of the following as at the date of receipt of consideration for share issue: ► Determined as per Rule 11UA. Break up value as per normative formula linked to the audited balance sheet ► As substantiated by the company to A.O’s satisfaction basis its assets including intangibles ► The FMV under DCF determined by merchant banker / accountant Case Studies on International Taxation (including Royalty & Capital Gains) 20 January 2017 slide 9
Issues under consideration ► What is the scope of trigger of charge u/s. 56(2)(viib) viewed in light of object and purpose of the section? ► Is it a SAAR to discourage issue of shares at huge premium? ► Is infusion at premium in July 2016 at value > 11UA valuation from an unrelated party basis negotiation covered by s. 56(2)(viib)? ► Is CCD infusion covered by s. 56(2)(viib)? ► Can the charge triggered get evaluated at the stage of conversion? ► How is the amount received determined at the stage of conversion of CCD? Case Studies on International Taxation (including Royalty & Capital Gains) 20 January 2017 slide 10
Fair value of shares issued by a company: S. 56(2)(viib) ► Par value issue at formation stage for cash is beyond s. 56(2)(viib) ► July 16 issue to an unrelated party based on intense negotiations but not supported by formal valuation ► Normative 11UA value is only one of the specified alternative method available at the option of the company ► Value can also be substantiated by the company independent of valuation report ► Onus of substantiating value to the satisfaction of A.O. is on taxpayer ► Fiercely negotiated value with third party and contemporaneous correspondence may prima facie support bonafide of valuation; expert valuation is not must ► Company may be advised to formalise the valuation as of July 2016 ► Valuation report as of January 2017 of an Expert valuing share at Rs. 500 (as against valuation of Rs. 1,000) needs to be explained Case Studies on International Taxation (including Royalty & Capital Gains) 20 January 2017 slide 11
Fair value of shares issued by a company: S. 56(2)(viib) ► January 2017 : Issue of CCD ► CCD is not shares ► Supported by an internal valuation report – though, valuation is not by an accountant / merchant banker ► Company will need to substantiate valuation unless it can obtain expert valuation report of an amount Rs. 500 ► If supported by well-reasoned opinion of accountant / merchant banker, A.O. cannot ignore the same unless report is proved to be perverse ► Conversion of CCD into equity may be regarded at fair value having regard to intrinsic value which may be obtained from the third party: ► Company had liability to return CCD: Rs. 100 on liquidation ► Company had inability to convert CCD worth Rs. 200 into share ► Company extinguishes liability of Rs. 200 and receives Rs. 200 towards shares Case Studies on International Taxation (including Royalty & Capital Gains) 20 January 2017 slide 12
Case study 3 : Exit from business enterprise – GAAR implications
Recommend
More recommend
