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Query
No. 1
Our
client is making import of betel nut from Bangladesh and he has to pay basic
Custom duty equalling 44% and for Balance of 56 % is being given Bank
Guarantee per shipment for one year and this BG may be renewed for further
period till the finalization of assessment by the Custom Department. Since
department is not yet decided what amount of custom duty should be levied on
the betel nut of Bangladesh.
Problems:
What
accounting treatment should be given: Can we treat this BG amount as purchase
cost by making provision of custom duty and sale value be realized accordingly
from the customers or it should be treated as contingent liability and no
provision should be made in the books?, and thereafter if BG amount is
recalled by the department then it should be debited to trading account on
payment basis then how we may collect this 56% amount of Basic value from the
customers, which is contingent nature at the time of purchase.
Answer
No. The
BG amount is not purchase cost at this stage. It is only a contingent
liability and no provision need be made at present. It shall be an amount
payable and liability on service of notice of demand. Such payment shall form
cost of purchase on their demand. It shall be a statutory liability. If the
querist treats it as purchase cost and claims it as an expenditure, such claim
would be hit by Section 43-B and disallowed, resulting in additional income.
Such amount shall be allowed as deduction in the year of payment.
The
querist is advised to collect the disputed amount of customs duty i.e. 56%,
for which he has furnished the BG, as refundable deposit from each customer
with an agreement that it would be paid to the Central Government if held
payable, else shall be refundable to the concerned customer. Such amount shall
be trust money in the hands of the querist and not income. In case the querist
does not keep as a refundable deposit – it would be difficult for him to
collect later from each purchase when BG is encashed. Please refer CIT vs.
Wolkem Pvt. Ltd. (1997) 227-ITR-129 (Rajasthan) and Siddheshwar Sahakari
Sahkar Karkhana Ltd. and others vs. C.I.T. (2004) 270-ITR-1 at 13 (S.C.).
Query
No. 2
Whether
in determination of book profit u/s 115JB of I. T. Act, adjustment is to be
made for:-
(a)
Depreciation not debited to P & L Account but a note is given in respect
thereof;
(b) Capital gain not credited to P & L account and taken to reserve;
(c) Prior period expenses and extra ordinary items;
(d) Difference in the amount of depreciation on account of change in the
method of providing depreciation i.e. straight line to WDV or vice-versa?
Answer
a) As
per provisions of Companies Act read with mandatory Accounting Standards
(AS-6) depreciation is a charge against profit and therefore, same is to be
deducted in determination of book profit even if disclosed by way of note to
accounts. Hon’ble Delhi High Court, recently, in the case of CIT vs. Sain
Processing and Weaving Mills (P) Ltd., ITA No.1128/2007/Delhi has held so.
(b) As
per AS-5 all items of income have to be routed through P & L Account and
therefore, department contention is that same is to be included in book
profit. Tribunal in certain cases and also Madras High Court in CIT vs.
Vijayashree Fin. & Inv. Co. (P) Ltd. (2008) 216 CTR (Mad.) 191, however, has
held that in view of decision of Supreme Court in the case of Apollo Tyres
Ltd. vs. CIT 255 ITR 273 no adjustment in book profit can be made.
(c)
Extraordinary and prior period items are charge against profit of the current
years though required to be shown separately as per AS-5 as a matter of
disclosure. Therefore, book profit is to be taken after prior period and extra
ordinary items. (CIT vs. Khaitan Chemicals & Fertilizers Ltd. (2008) 307 ITR
150 (Del.).
(d)
Assessee is entitled to change method of depreciation (AS-6) and therefore, no
adjustment can be made on account of difference in amount of depreciation
arising as a result of change in method of depreciation. [Malayala Manorama
Co. Ltd vs. CIT, 300 ITR 251 (SC); CIT vs. C.J. International Hotels Ltd ITA
No. 1092/2008 (Del)].
Query
No. 3
Whether
for the purpose of determination of book profit under Section 115 JB of the
Act loss or depreciation has to be taken cumulatively for all the years or for
each year separately?
Answer
As per
Clause (iii) of Explanation to Section 115 JB amount of loss brought forward
or unabsorbed depreciation, whichever is less as per books of account, is to
be reduced. The amount of loss or depreciation as per books would be one
consolidated figure and above clause does not require determination of amount
on year-to-year basis. [Amline Textiles Pvt. Ltd. vs. ITO (2009) 27 SOT 152
(Mum.)]
Query
No. 4
Whether
for the purpose of disallowance under Section 14A of the Act:-
(a)
Rule 8D is to be considered as retrospective;
Whether
before application of Rule 8D the Assessing Officer should give a holding that
he is not satisfied for the basis or quantum of expenses disallowed by the
Assessee;
Whether
disallowance is to be made if Investment is held as stock-in-trade?
Whether
Rule can be applied for disallowance of interest on proportionate basis in
case assessee provide details of direct nexus between investments and
borrowings;
Whether
total administrative expenses incurred can be disallowed if disallowance as
per Rule works out to be higher?
Answer
(a)
Since, sub - Section (2) of Section 14A was inserted w.e.f. 1-4-2007 and
pursuant thereto Rule 8D has been notified on 24-3-2008, same should apply
prospectively since it effects the quantum of expenditure. (ITAT (TM) (Del) in
the case of Wimco Seedlings vs. CIT (107 ITD 267). Special Bench Mumbai
however, in the case of ITO vs. Daga Capital Management (P) Ltd. (2008) 26 SOT
603 (Mum.) has held otherwise. Issue is yet to be settled.
(b) As
per provisions of sub-Section(2) of Section 14A as well as Rule 8D method
provided in Rule 8D is to be applied by the Assessing Officer only if he is
not satisfied with the correctness of the basis and the quantum of expenditure
disallowed by an Assessee. Accordingly, the Assessing Officer cannot straight
away adopt Rule 8D without giving a holding that the basis adopted by the
Assessee is not correct.
(c) It
is a matter of controversy at present whether interest as well as other
expenses should be disallowed by applying Rule 8D to the investments held as
stock-in-trade. ITAT Mumbai in the case of Daga Capital Management (P) Ltd.
(2008) 26 SOT 603 (Mum.) has held that Rule will apply. It is, however, stated
in this regard that earning of dividend on stock-in-trade cannot be said to be
a separate venture than the business of trading of shares and therefore no
disallowance can be made as per Rule in view of decisions of Supreme Court in
the cases of CIT vs. Indian Bank Ltd 56 ITR 77 and Rajasthan State Warehousing
Corporation vs. CIT, 242 ITR 450.
(d) Clause (i) of Sub Rule (2) provides for disallowance of expenditure
directly relating to exempt income. Other clauses provides for disallowance on
proportionate/ad-hoc basis. Accordingly, in case the assessee has calculated
disallowance on direct nexus basis the AO should accept the disallowance and
proportionate / ad-hoc basis cannot be applied.
(e) In
case disallowance calculated at one-half percent of average investment, works
out to be higher than the actual expenses incurred by the company and the
company is also carrying on some other business, Rule 8 D becomes inapplicable
and, therefore, reasonable basis should be adopted by the AO to make
disallowance of the expenses relating to the exempt income.
Query
No. 5
Whether
for levy of penalty under Section 271(1)(c) of the Income-Tax Act the
Assessing Officer is required to consider facts of the case and give a holding
that the assessee has concealed the income or furnished inaccurate particulars
inspite of decision of Supreme Court in the case of UOI vs. Dharmendra
Textiles Processors, 306 ITR 277 (SC)?
Answer
Penalty
is leviable only if there is concealment or an assessee has furnished
inaccurate particulars. Further, Section 273B provides that no penalty is
leviable if there is a reasonable cause for the failure to disclose the item
of income. Therefore, it is necessary that Assessing Officer should make out
the case of concealment or furnishing of inaccurate particulars. He should
also take into consideration explanation of the assessee and submissions
regarding reasonable cause for non-disclosure of the income. The decision of
Supreme Court in the case UOI vs. Dharmendra Textiles Processors 306 ITR 277
(SC) is only to the effect that mens rea is not required.
Query
No. 6
Whether
Explanation to Section 73 is also applicable to profit earned on transactions
of purchase and sale of shares and loss of earlier years can be set off
against the same?
Answer
Section
73 provides for set off of the loss and in that context Explanation has
provided that business of purchase and sale of shares will be deemed to be
speculation business. In case of profit a view can be taken that above
Explanation is not applicable and in terms of Explanation 2 to Section 28 read
with Section 43(5) of the Act only such transactions which are otherwise than
by way of actual delivery are in the nature of speculative transactions.
Accordingly, loss suffered in such transactions may not be available for set
off against profit earned in subsequent year(s).
Query
No. 7
Whether
in terms of Section 2(22)(e) of the Act deemed dividend is taxable in the
hands of the shareholder or in the hands of the concern to which loan or
advance has been given?
Answer
As per
provisions of Section 206 of the Companies Act, dividend can be paid by the
company only to the registered shareholder and accordingly same is taxable
only in the hands of registered shareholder as per deeming provisions of
Section 2(22)(e) of the Act also. [CIT vs. Hotel Hiltop (2008) 217 CTR 527 (Raj.);
Nulon India Ltd. vs. ITO (2007) 12 SOT 260 (Del.); ACIT vs. Bhaumik Colour
Pvt. Ltd. ITA No. 5030/Mum/04 dated 19-11-2008].
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