Brains’ Trust

Presentation By:

Gautam Doshi

March 1, 2020
Q. 3: 56(2)(viib) vis-a-vis 56(2)(x)

A Pvt. Ltd. wants to issue shares on a preferential basis to Mr. Z who is presently not a
shareholder of A Pvt. Ltd. Rule 11UA valuation for the shares is different for Section 56(2)(x)
and Section 56(2)(viib) i.e. the fair value of the specified properties (primarily immovable
property, shares & securities) are to be considered for Rule 11UA u/s 56(2)(x) and not for
Rule 11UA value u/s 56(2)(viib). Take for example Rule 11UA for Section 56(2)(x) is Rs. 200
and for Section 56(2) (viib) is Rs. 150.

If the Company issues shares for more than Rs. 150 – the company may be liable to tax u/s
56(2) (vii b) and if the company issue shares for less than Rs. 200 the shareholder may be
liable to tax u/s 56(2)(x).

What is the solution?

Gautam Doshi 2 01-03-2020

 Q. 3 - View:

 Option to substantiate the claim of fair value before AO - Explanation (a) to S. 56(2)(viib):
 Fair Value higher of:
o As may be determined under Rule 11UA(2); or
o Value as may be substantiated to the satisfaction of AO

 Lalithaa Jewellary Mart (P.) Ltd. v. ACIT (178 ITD 503) (Chennai Trib.) – If no defect or error found
by the AO in value arrived by the assessee - valuation method under Rule 11UA need not be
applied

 Valuation method prescribed under the Rules are directory in nature:

 Smt. Kusumben D. Mahadevia v. N.C. Upadhya (124 ITR 799) [1980]
 CIT v. Antony Mandes (191 ITR 346) [1991]

 Fair market value as prescribed under Rule 11UA – Delegated Legislation – cannot
override the Act

Gautam Doshi 3 01-03-2020

 Q. 3 - View:

 Mischief Rule - K. P. Verghese V. ITO (131 ITR 597)

 S. 56(2)(viib) – To curb the generation and use of unaccounted money

 Must be read to plug the mischief and should not be applied to genuine cases

 Clearview Healthcare (P.) Ltd. v. ITO (114 taxmann.com 167) (2020) (Del. Trib)

 DCIT v. Pali Fabrics (P.) Ltd. (110 taxmann.com 310) (2019) (Mum. Trib)

 Can it be argued that Section 56(2)(x) does not apply to a primary issuance – is not
receipt of shares in existence? – Sudhir Menon HUF v. ACIT (162 TTJ 425) (Mum. Trib)
(against)

Gautam Doshi 4 01-03-2020

Q. 4: Section 80EEA

The Finance Act (No. 2), 2019 inserted S. 80EEA to allow deduction of interest on loan
taken for acquiring a residential house property. Section inter alia requires that the stamp
duty value does not exceed Rs.45 lakhs.

Whether a person would be entitled to claim S. 80EEA benefit if he has acquired the
residential house for Rs.50 lakhs, if the Ready Reckoner value of the flat is Rs.42 lakhs?

Gautam Doshi 5 01-03-2020

Q. 4 - View:
 Conditions for claiming deduction:
 Loan sanctioned by financial institution during the period 01.04.2019 to 31.03.2021
 Stamp duty value does not exceed Rs. 45 lakhs – benefit cannot be obtained by undervaluation;
objective test of value applied – real value is an uncertain number - hence, benefit available even if
stamp duty value is satisfied even though real value is higher.
 Assessee does not own any other house property on date of sanction of loan

 No condition with regards purchase value in S. 80EEA (S. 80EE – value does not exceed
Rs. 50 lakhs – does not use the word stamp duty value – transaction value is a strong but
not infallible indicator of value)

 In the hands of builder Excess payment is not hit by S. 56(2)(x)/Section 43CA as in any
case consideration received is offered for tax.

Gautam Doshi 6 01-03-2020

Q. 7: Computation of disallowance u/s. 14A

Whether Supreme Court ruling in case of Maxopp Investment Ltd v. CIT (2018) 402 ITR 640
(SC), has upheld the applicability of S. 14A on stock in trade? If yes, how does one compute
the amount of disallowance u/s 14A?

Gautam Doshi 7 01-03-2020

Q. 7 - View:

 Maxopp Investments Ltd. v. CIT (402 ITR 640) (SC):

 Whether shares acquired as stock-in-trade stand on a different pedestal vis-à-vis
shares acquired for gaining control? – yes, but both are liable to be considered for
computing disallowance under Section 14A

 SC has upheld decision but, not the basis of arriving at decision in State Bank of
Patiala?

 Whether it can still be argued that dividend earned was only by quirk of fate? – Even
so factual analysis required to ascertain expenditure, if any, for earning dividend. In
the absence of analysis by the Assessee Rule 8 would apply subject to maximum of
exempt income earned by Assessee

Gautam Doshi 8 01-03-2020

Q. 7 - View:

 Favourable decisions after considering Maxopp:

 PCIT v. Punjab and Sind Bank (ITA No. 904 of 2019) (Del. HC)

 Nice Bombay Transport v. ACIT (175 ITD 684) (Del. Trib) (Non-banking decision)

 Central Bank of India v. DCIT (MANU/IU/0131/2020) (Mum. Trib)

 Against decisions after considering Maxopp:

 Gajanan Enterprises v. ACIT (MANU/IU/1465/2019) (Mum. Trib) (Non-Banking)

 Karur Vysya Bank Ltd. v. ACIT (MANU/IX/0035/2019) (Jaipur Trib.) (Banking)

Gautam Doshi 9 01-03-2020

Q. 8: 194M

The Finance Act (No. 2), 2019 introduced Section 194M which inter alia requires an
individual or a HUF (other than those required to deduct income tax u/s 194C, 194H or
194J) to deduct tax @ 5% for carrying out any work, payment by way of commission or
brokerage or fees for professional services. The amendment in inserted w.e.f. September 1,
2019.

Queries

• Whether the payments prior to September 1, 2019 (i.e. from April 1, 2019 to August 31,
2019) are to be considered in computing the limit of Rs. 50Lakhs?

• If a person makes payment of Rs.51lakhs during August 2019 & Rs.2lakhs on 30th
September. On what amount is he required to deduct tax?

Gautam Doshi 10 01-03-2020

Q. 8 - View:
 The section came into effect from 01.09.2019

 No liability to deduct TDS if aggregate of sums, credited or paid, during the financial
year, does not exceed Rs. 50 lakhs

 Press release dated 30.08.2019 for S. 194N (which similarly came into effect from
01.09.2019 and has a limit of Rs. 1 crore) clarifies that:
 Cash withdrawal prior to 01.09.2019 – not subject to TDS

 Limit of Rs. 1 crore is with respect to a previous year – calculation of amount of cash withdrawal
for triggering deduction u/s. 194N shall be counted from 01.04.2019

Gautam Doshi 11 01-03-2020

Q. 11: Applicability of TDS Provisions under section
194C
Mr. B’s turnover for F.Y. 2018-19 is Rs. 1.25 Crores. However, he has offered income u/s.
44AD @ 8% of Turnover and not subjected himself to Tax Audit. For F.Y. 2019-20, he is
making payment for Interest, which is subject to TDS u/s. 194A. He is also making a
payment to a contractor. He is carrying a view that TDS deduction is required for interest
payment u/s. 194A. However as far as payment to contractor is concerned, the same is not
required to be deducted u/s. 194C due to the fact that he has actually not undergone tax
audit in the earlier financial year. Please guide whether his view for both the sections are
correct?

Gautam Doshi 12 01-03-2020

Q. 11 - View:
 Finance Bill, 2020 replaced the existing language of both the sections to provide for
absolute limits u/s. 194A and 194C – 1 crore for business and 50 lakhs for profession

 Prior to amendment –
 words used u/s. 194A: “the monetary limits specified under clause (a) or clause (b) of
section 44AB”

 words used u/s. 194C: “is liable to audit of accounts under clause (a) or clause (b) of section
44AB”

 Proviso to S. 44AB: T/o below 2cr – profits declared u/s. 44AD – S. 44AB N.A.

 Ordinarily a proviso to a section is an exception to the section and not an extension:

 A.H. Sehgal and Ors. v. Raje Ram Sheoram and Ors (SC) (Civil Appeal no. 4094 of 2014)

 Dwarka Prasad v. Dwarka Das Saraf (SC) (Civil Appeal no. 210 of 1973)

 Nagar Palika Nigam v. Krishi Upaj Mandi Samiti and Ors. (Civil Appeal No. 1921 of 2006)

Gautam Doshi 13 01-03-2020

Q. 12: Section 115QA- Tax on distributed Income to
shareholders.
a. Does redemption of preference shares attract tax u/s 115QA of the Income Tax
Act?

b. Does conversion of convertible preference shares into equity shares attract tax
u/s 115QA of the Act?

Gautam Doshi 14 01-03-2020

Q. 12 - View:
Buy-back defined under S. 115QA – “purchase by a company of its own shares”
Redemption:

 Capital gains on Redemption – Taxable in the hands of shareholders - Anarkali Sarabhai

v. CIT (224 ITR 422) (SC)

 S. 115QA:
 Anarkali Sarabhai (supra) – In effect, on redemption, the company has bought back the preference
shares from the shareholders

 If redemption taxed as buy-back under S. 115QA – CG exempt in the hands of shareholders [S.
10(34A)]

 Grey Area – On redemption the shares are extinguished in the hands of shareholders,
there is no “purchase” by the company

Gautam Doshi 15 01-03-2020

Q. 12 - View:
Conversion:

 Capital gains on Conversion –

 Exempt u/s. 47(xb) w.e.f 01.04.2018

 Prior to 01.04.2018 – Taxable

o Explanatory Memorandum to Finance Act, 2017 – Conversion of securities from one form to
another - Taxable

o ACIT v. Trustees of H.E.H. The Nizam's Second Suplementary Family Trust [1976] (102 ITR
248) (AP HC) – Conversion of redeemable preference shares to equity shares is an exchange

o CIT v. Santosh L. Chowgule [1998] (234 ITR 787) (Bom HC) – Conversion of equity shares to
irredeemable preference shares - Exchange of one kind of shares by another kind having
different rights and liabilities

 However, w.r.t conversion of CCPS to Equity – Non-taxable transfer - Periar Trading

Company (P.) Ltd. v. ITO (174 ITD 137) [2018] (Mum. Trib.)

Gautam Doshi 16 01-03-2020

Q. 12 - View:
Conversion:

 Buy-Back:
 Conversion – can be achieved by the following two ways:
o Variation of rights – No purchase of shares

o Fresh-issue – Exchange?
• Barter is not a purchase – not a Buy-back for S. 115QA

 CIT v. Motors and Generals (P.) Ltd. (66 ITR 692) (1967)

 State of T.N. v. Srinivasa Sales Circulation (10 SCC 648) (1996)

Gautam Doshi 17 01-03-2020

Q. 15: Expenditure on CSR

A Pvt. Ltd. is required to contribute Rs. 10 crore as per Companies Act, 2013 under CSR for
the year ended 31.03.2019. The company contributed Rs. 10 crore during the F.Y. 2018-19
towards purchase of solar panels and made payment before 31.03.2019. As on 31.03.2019,
these solar panels were under installation and therefore Rs. 10 crore was shown as Capital
WIP.
Query:
a. Whether Rs. 10 crore will be covered as expense incurred towards CSR even if the same
is not debited to the Profit & Loss A/c?
b. In F.Y. 2019-20, since the solar panel is installed and put to use, can A Pvt. Ltd. claim
depreciation u/s 32 of the Income Tax Act, 1961?
c. Is it mandatory to write off Rs. 10 crore to profit and loss account in F Y 2019-20 to remain
covered as expense under CSR? And Company continues to take deprecation in
computation under Income Tax?

Gautam Doshi 18 01-03-2020

Q. 15 - View:
 S. 135 of Companies Act, 2013 uses the word ‘spends’:
 Indian Molasses Co. (P.) Ltd. v. CIT (37 ITR 66) (SC) - But the idea of "spending" in the sense of
"paying out or away" money is the primary meaning.

 Dictionary meaning – “give (money) to pay for goods, services, or so as to benefit someone or
something.”

 CSR expenditure can be ‘revenue’ or ‘capital’ in nature – ICAI FAQs on CSR u/s. 135 of
Companies Act, 2013

 As long as expenditure incurred, the condition of Companies Act, 2013 fulfilled. Income-tax
decisions where capital expenditure allowed as application of income for charitable trust:
 CIT v. Rajasthan and Gujarati Charitable Foundation Poona (402 ITR 441) (SC)

 CIT v. Indian Institute of Banking Personnel (264 ITR 110) (Bom. HC)

Gautam Doshi 19 01-03-2020

Q. 15 - View:
 Depreciation on capital expenditure allowed as deduction u/s. 32. Explanatory memorandum to
Finance Act, 2014:
“…However, the CSR expenditure which is of the nature described in section 30 to section 36 of the Act shall be
allowed deduction under those sections subject to fulfillment of conditions, if any, specified therein.”

 Expenditure to be allowed as a deduction irrespective of whether income is earned on account of

expense incurred:
 CIT v. Rajendra Prasad Mody (115 ITR 519) (SC)
 Binodiram Balchand v. CIT (48 ITR 548) (MP HC)

 Expenditure incurred for the purpose of rationalisation of administration and modernization of

machinery, compliance to other acts, etc. to be allowed as a deduction (CIT v. Malyalam Plantations
Ltd. (53 ITR 140)) (SC)

 Expenditure incurred for the purpose of local community which in turn will generate goodwill for the
company – to be allowed as a deduction? – CIT v. Madras Refineries Ltd. (266 ITR 170) (Mad. HC)

Gautam Doshi 20 01-03-2020

Q. 16: Conversion into LLP

Statutory exemption is not available u/s 47 of the Act. What is the tax implication on
conversion of company/partnership firm into LLP in the hands of -

a. Company/Partnership Firm

b. Shareholders of the Company/Partners of the firm

c. LLP

Gautam Doshi 21 01-03-2020

Q. 16 - View:
 LLP Act – provides all properties shall be transferred to and shall vest in the limited liability
partnership without further assurance
 Thus, vesting is pursuant to deemed transfer
 Vali Pattabhiraman Rao v. Shri Ramanuja Ginning and Rice Factory P. Ltd. (60 Com Cases 568) [1986] –
conversion of partnership into company – whether can be extended to conversion of company into LLP? –
Under Company Law “….shall, on such registration, pass to and vest in the company…”

 In the hands of company/partnership – Taxable – Full Value of Consideration is value recorded

in books of LLP – Not Fair Value
 Aravali Polymers LLP v. JCIT [2014] 47 taxmann.com 335 (Kolkata - Trib.)
 ACIT v. Celerity Power LLP (100 taxmann.com 129) (Mum. Trib)
 Opposite view – Transfer has to be between two existing person – Transfer cannot be to a non-existent
person
 No consideration accrues to/received by the company/partnership? – CIT v. Texspin Engg. And Mfg.
Works (263 ITR 354) (Bom. HC)

Gautam Doshi 22 01-03-2020

Q. 16 - View:
 In the hands of shareholders/partners – AAR (Delhi) in case re. Domino Printing Science
Plc
 Whether there is transfer? – Yes

 Computation of gains - Value of partnership interest in newly formed LLP

 Assumption of Legislature is not law – S. 47(xiiib) of Income-tax Act, 1961

Gautam Doshi 23 01-03-2020

Q. 19: Reassessment - dismissal of SLP

The Hon. Bombay High Court in the case of Bayer Material Science Pvt. Ltd. Vs. DCIT
(2016) 382 ITR 333 (Bom.) has held that a reassessment order passed without disposal of
objections by the assessing officer is void and hence is liable to be quashed. Per Contra, the
Hon. Supreme Court has dismissed SLP filed by the assessee in the case of Home Finders
Housing Ltd. Vs. ITO (2018) 256 Taxman 59 (SC), wherein the High Court had held that
non-disposal of objection is a procedural defect and the same is a curable defect. Please
give your valuable view on the impact of the dismissal of SLP in the case of Home Finders
Housing Ltd and guide whether the same overrules the decision of the Hon. Bombay High
Court in the case of Bayer Material Science Pvt. Ltd.

Gautam Doshi 24 01-03-2020

Q. 19 - View:
 Objections filed by Assessee against re-opening notice to be disposed by way of speaking
order - GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19

 Bom. HC in Rabo India Finance Ltd. v. DCIT (346 ITR 81) and IOT Infrastructure & Energy
Services Ltd. v. ACIT (329 ITR 547) – Matter remanded - AO to first dispose off the objections
filed by the assessee – Thereafter, pass the re-assessment order

 Bom. HC in Bayer Material Science Pvt. Ltd. v. DCIT (382 ITR 333) – Passing of assessment
order not sustainable if objections not disposed. In KSS Petron v. ACIT (ITA No. 224 of 2014) –
Matter not to be remanded back – unnecessary harassment to the assessee

 Mad. HC in Home Finders Housing Ltd. v. ITO (404 ITR 611) - non-compliance of the
procedure indicated in the GKN Driveshafts (India) Ltd.'s would not make the order void or non-
est - only a procedural irregularity which could be cured – SLP against the Mad. HC decisions
dismissed – Non-speaking SLP dismissal

Gautam Doshi 25 01-03-2020

Q. 19 - View:
 Non-speaking SLP dismissal is not binding in nature:
 Kunhayammed v. State of Kerala (245 ITR 360) (SC) (3 judge)
 Khoday Distilleries Ltd. v. Sri Mahadeshwara Sahakara (Civil Appeal No. 2433 of 2019) (SC 3
judge)
 Hemalatha Gargya vs. CIT (2003) 259 ITR 1 (SC)

 Considering SLP, following are favourable and against decisions:

 Favourable:
o DCIT v. Ms. Firstsource Solutions Ltd. – (ITA No. 3895 & 3896/Mum/ 2016) (Mum. Trib)
o Abhijeet Despande v. DCIT (ITA No. 492/Pun/2018) (Pune Trib.)
 Against:
o Laxmi Rolling and Strips Private Limited (2013/Bang./2019) (Bang. Trib)

Gautam Doshi 26 01-03-2020

Q. 20: Survey Action r.w.s. 115BBE

During survey action, declarations are taken against excess stock lying physically found and
against investment found during survey which were either not recorded or were not fully
disclosed in the books of account. In such case, can A.O. apply special rate u/s. 115BBE? If
yes, what precaution should be taken at the time of declaration so that provisions of section
115BBE are not applicable?

Gautam Doshi 27 01-03-2020

Q. 20 - View:
 Deemed income u/s. 69, 69A, 69B & 69C – has to be taxed under one of the heads
of income specified u/s. 14:
 CIT v. Shilpa Dyeing & Printing Mills (P) Ltd [219 Taxman 279] (Guj. HC) (2013)

 Excess stock found which is not separately or clearly identifiable but is a part of
mixed lots of stock found at the premises – Assessable as Business Income and not
deemed income:
 Fashion World v. ACIT [ITA No 1634/Ahm/2006]
 Chokshi Hiralal Maganlal v. DCIT [45 SOT 349] [2011]
 DCIT v. Shri Ram Narayan Birla [ITA No. 482/JP/2015]

Gautam Doshi 28 01-03-2020

Q. 20 - View:
 Undisclosed income attributable to known source – Taxable under that source –
Not under sections 69, 69A, 69B and 69C
 Fashion World v. ACIT [ITA No 1634/Ahm/2006]
 Does S. 115BBE applies?
o S. Famina Knit Fabs v. ACIT (176 ITD 246) [2019] (Chandigarh Trib.) – Source known – cannot
be taxed as deemed income – S. 115BBE N.A.
o ACIT v. Sanjay Bairathi Gems Ltd (166 ITD 445) [2017] (Jaipur Trib.) – Held business income –
However, applied S.115BBE

 Income of which source cannot be identified – Taxable under sections 69, 69A, 69B
and 69C

Gautam Doshi 29 01-03-2020

Q. 20 - View:
 Source identified but wholly undisclosed – smuggling business – whether sections
69, 69A, 69B and 69C or section 28 to 44D? – CIT v. Piara Singh (124 ITR 40) (SC)

 During survey – disclosed income whether to link to known source?

 Consider consequences under other laws like GST, Customs, FEMA, etc.

Gautam Doshi 30 01-03-2020

 31

Thank You

Gautam Doshi 01-03-2020