ca c. neelakantan ashok leyland limited - sirc · ca c. neelakantan ashok leyland limited may 16,...

CA C. Neelakantan

Ashok Leyland Limited

Work shop on Direct Taxes May 16, 2014 1

Sec 14A – read with Rule 8D

Sec 32 – Restriction of depreciation

Sec 35 – Non-eligible Scientific Research Exp.

Sec 37 & 43A-

◦ Foreign exchange differences

◦ Spend on Corporate Social Responsibility

Sec 40 – Amounts not deductible

Sec 40A - Expenses not deductible

Sec 43B - Disallowances


Key words ◦ In relation to (casual relationship enough)

◦ Income not includible in Total income i.e. Sec. 10 exemptions

Procedural irks ◦ Re-opening

◦ Lower risk of invoking 271(1)(c)


Rule 8D (formula based) is mostly adopted by AOs

Three limbs of Rule 8D:

(i) Direct expenditure

(ii) Proportionate expenditure

= Interest expense x Average Investments

Average Assets

(iii) Operating expenditure = 0.5% of Average Investments

Rule 8D is applicable prospectively – Godrej and Boyce Mfg Co. vs.DCIT -328 ITR 81 – Bom.HC

Rule 8D can be adopted only when the AO proves that the disallowance made by Assessee is not satisfactory - Jasoda Devi Charitable Trust Vs. CIT (2010) 4 ITR 457 (Jaipur)(Trib.)


Disallowance u/s. 14A by Assessee to be based on scientific methodology with appropriate documentation

Interest Expenditure attributable as per 2nd limb – If the end-use of Borrowings is for specific taxable purpose, then 2nd limb will not be applicable - ACIT vs. Best and Crompton Engineering Limited - ITA No.1603/Mds/2012 dt.16.07.2013 – ITAT Chennai, Raj Shipping Agencies Ltd. Vs. ACIT [2013] 146 ITD 277

Considering Average Value of Investments other than Investments yielding taxable income i.e. Total Investments less Investments in foreign subsidiaries (as the dividend from the same is taxable u/s. 115BBD), Bonds (interest is taxable)

Total Assets – Old Sch.VI: Total as per Balance Sheet (+) Current Liabilities (–) Dr. balance in P & L a/c (-) Reval. Res

- Rev. Sch.VI: Total of Balance sheet (-) Reval. Res


REI Agro Ltd vs. DCIT - Kolkata ITAT- TS – 271-ITAT-2013 - Investments which actually earned exempt income during the year has to be considered for 14A disallowance r.w. Rule 8D – however CBDT Circular no.5/2014 dt. 11.02.2014 clarified that the words ‘includible’ is used in S.14A and hence all the investments to be considered despite no actual earning of exempt income during the year.

Rule 8D –2nd limb not applicable for Investment in Subsidiary/Strategic reasons

o For: JM financial Limited vs. ACIT – Mum. ITAT – ITA No.4521/Mum/2012 – 26.03.2014 and Holcim (India) Pvt Ltd Vs DCIT. ITA Nos.5123 & 5124/Del/2012

o Against: Maxopp Investments Limited [TS-668-HC-2011] – Del.HC


Controversy over who is the “owner” for the claim of depreciation – especially in “Finance lease” – New Direct tax code shifts it from Lessor to Lessee

Additional depreciation – 20% ◦ Applicable only for new plant and machinery

◦ Not installed in office premises, residential house, Guest house

◦ Restricted to 10% for assets used < 180 days

◦ No additional depreciation for assets having 100% depreciation (Pollution control) rates (if used < 180 days)

Sec 38 – Where any building, machinery, plant or furniture is not exclusively used for the business or profession, AO can restrict the expenditure to a fair proportion


Expenditure to be on “research” – What is research is covered in Section 43(4) ◦ Does not include any expenditure incurred in the

acquisition of rights in, or arising out of scientific research.

Expenditure to be incurred in “approved in-house R & D facilities” ◦ Approval in Form 3M should has to be obtained, else there

can be no allowance under this section. There is controversy on the allowance of expenditure for the whole year, if the approval is obtained mid-year

◦ R & D activities carried outside India, even if directed and controlled from in-house R & D facility – do not qualify for claim


Expenditure to be directly identifiable to the approved R & D center ◦ Utilities from a common source to be separately metered

Expenditure on manpower of other departments based on time spent on R & D is not allowed

Expenditure of a general nature, overheads of common nature is not allowed

Money / Gifts / Subsidy / Grants / Donations etc. received should be credited to the expenditure and only net expenditure is to be claimed


Specific exclusions as per DSIR guidelines:

• Expenditure on outsourced R&D activities

• Expenditure purely relating market research, sales promotion, quality control, commercial production, style changes

• Lease rent paid for research labs

• Foreign patent filing expenditure

• Foreign consultancy expenditure

• Building maintenance, municipal taxes, rental charges paid

• Interest components on loans for R&D

• Clinical trial activities carried out outside approved facilities

• Contract research expenses

• Payments made to Board of directors/ part-time employees.


Expenses “wholly and exclusively” for business –

dominance of purpose

Not a Capital expenditure

Not in the nature of expenditure for offence or

prohibited by law

Current/Emerging Issues:

Foreign Exchange differences

CSR activities


Realised Unrealised

Fixed assets - Imported

- Supplier liability Covered by 43A Non taxable/not claimable

- Foreign currency loans Covered by 43A Non taxable/not claimable

Fixed assets – Domestic

- Foreign currency loans Non taxable/not claimable (other than covered by 43A)

Non taxable/not claimable

Fixed assets – relating to R & D – Covered by 35

Covered by 43A Non taxable/not claimable

Fixed assets – relating to R & D – Covered by 35(2AB)

Taxable / Claimable Taxable / Claimable


Realised Unrealised

Investments On sale of Investments – Consideration to be adjusted

Not applicable

Loans given to foreign companies

Non taxable/not claimable Non taxable/not claimable

Foreign currency loans used for the purpose of giving loans

Non taxable/not claimable Non taxable/not claimable

Foreign currency borrowings – as part of circulating capital (like Packing credit)


Cash balances Non taxable/not claimable Non taxable/not claimable


Realised Unrealised

Trade transactions – reckoned in the P&L account


Trade transactions – reckoned in Hedge reserve


Forward contracts – Hedging transactions

Will follow the treatment of the underlying

Will follow the treatment of the underlying

Other derivative contracts Taxable / Claimable Taxable / Claimable


Fluctuation gain on capital account – not taxable - Sutlej Cotton Mills Ltd. Vs. CIT [1979] 116 ITR 1 SC , E.I.D. Parry Ltd. Vs. CIT [1988] 174 ITR 11 (Mad.) & Triveni Engg. Works Ltd. Vs. CIT [1985] 156 ITR 202 Delhi HC

Treatment of Exchange gain on revenue domain as per Accounting Standards (both realised and unrealised) – blessed by SC- CIT Vs. Woodward Governor India (P) Ltd (2009) 312 ITR 254 & DCIT v. Bank of Bahrain and Kuwait,(ITA Nos. 4404 & 1883/Mum./2004


CSR – Mandatory as per Companies Act 2013 for companies with specified annual turnover/profits – 2% of Profits

Capital expenditure such as school or a hospital building – may not be allowed u/s 37

If the nature of CSR expenditure is such that no capital asset of taxpayer’s ownership is created (such as expenditure incurred on distribution of clothes or medicines, expenditure on free health camps, etc.) this condition will not be a hurdle

Installation of Traffic signals, where there is benefit to employees and general public has been allowed – CIT vs. Infosys Technologies Limited (2014) 43.taxmann.com 251 – Kar.HC

Available deductions for CSR: o Research – 35 (1)(ii) (175%); (iia), (iii) (125%)

o Approved Project - 35AC

o Rural development – 35CCA

o Conservation projects – 35CCB

o Agriculture – 35CCC (150%)

o Skill development – 35CCD (150%)

o 80G - (mostly 50%, subject to GTI)


TDS liability applicable on payment or credit to account, which ever is earlier ◦ Controversy regarding “payable” has been put to

rest with Circular (10/DV/2013) which has clarified that “payable” includes paid during the year.

Amount of expenditure will be deductible to the extent, TDS has been deducted and paid (even, if it is proportion in case of short deduction)

If Form 26A certified by an accountant can be obtained from a resident payee that he has discharged his tax liability, there will not be a disallowance


Other amount disallowed: ◦ Fringe benefit tax

◦ Any Tax levy on profits and gains of any business

◦ Wealth tax

Does not include any tax chargeable on assets of the business or profession (Wealth tax is applicable for Land / Building / Motor cars / Jeeps)

◦ Any Tax borne by Employer on employee perks


Transactions with persons covered by 40A (2)(b) ◦ Now covered by SDT ◦ Filings done in Form 3CEB ◦ Onus has now shifted to the assessee ◦ Words “ALP” has been substituted for “excessive or

unreasonable”

Payment in excess of Rs.20,000 other than by account payee cheque / draft ◦ Exceptions : Rule 6 DD

Unapproved gratuity fund Setting up / contribution to fund not covered

by Sec 36 or if required by statute


Deductible only on payment basis:

Tax, duty, cess or fee

Employer’s contribution to PF, SAF, Gratuity funds or other employee welfare fund

Employee bonus or commission

Interest on loan ◦ Financial institution

◦ Scheduled bank

Leave encashment


Does not include “constructive” payments like Transfer of liability as part of undertaking

Conversion of interest due as Loan

Where there is weighted deduction (like employee related claim u/s 35(2AB), the disallowance should be for the weighted portion also

Disputed taxes – Safer to claim on “payment basis”, even though they might not have been debited to P & L a/c

Profits u/s 80IA, 80IC should take into account 43B disallowances which arriving at Profits


Thank You

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044-22206841


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ca c. neelakantan ashok leyland limited - sirc · ca c. neelakantan ashok leyland limited may 16,...

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