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Domestic tax updates : july 2018


Removal of the word ‘an Accountant’ from Rule 11UA

Notification No. 23/2018 dated 24th May 2018

Rule 11UA determines the fair market value (FMV) in respect of movable and immovable property. For determination of FMV of unquoted shares/securities as defined under Section 56(2)(viib), earlier the discounted free cash flow method could be used by obtaining a certificate from a merchant banker or an accountant. The Rule is amended by notification to omit the words ‘or an accountant’. Hence the Report for valuation of unquoted shares/ securities using the Discounted Free Cash flow Method can now be obtained only from a merchant banker.[/vc_column_text]

Applicability of provisions of Section 56(2)(viib)

Notification No. 24/2018 dated 24th May 2018

Section 56(2)(viib) brings to tax the consideration for issue of shares if it exceeds the FMV of shares. This provision is not applicable if the shares are issued at face value, or are issued to non-residents, or are issued by a Venture Capital Undertaking from a Venture Capital Company or Fund. It is now notified that this provision will not apply to consideration received by eligible start-ups for issue of shares that exceed the face value of such shares, if the consideration has been received from an investor in accordance with the approval granted by the Inter-Ministerial Board of Certification.

Notification of Cost Inflation Index for FY 2018-19

Notification No. 26/2018 dated 13th June 2018

The Cost Inflation Index for FY 2018-19 is notified as “280”. The notification will come in force with effect from 1st April 2019 and should be applied to AY 2019-20.

54EC Capital Gains Bonds Notified

Notification No. 27-28/2018 dated 18th June 2018

The Central Government has notified ‘Indian Railway Finance Corporation Limited 54EC Capital Gains Bond’ issued by Indian Railway Finance Corporation Limited and ‘Power Finance Corporation Limited 54EC Capital Gains Bond’ issued by Power Finance Corporation Limited for claiming exemption under Section 54EC of the Act. The benefit under Section 54EC will not be denied in case of transfer of such bonds, provided such transfer is by delivery or endorsement and the transferee informs the Indian Railway Finance Corporation Limited or the Power Finance Corporation Limited as the case may be, by registered post within 60 days of transfer.

Recent Judicial Decisions

Charitable Trust

Society, earning franchisee fees from other schools, which were used for furtherance of educational purposes, was entitled to exemption under Section 10(23C)(vi)

Director of Income-tax (Exemption) vs. Delhi Public School Society [TS-169-HC-2018(DEL)]


The assessee was a society registered with the Registrar of Societies and had established 11 schools. The assessee also permitted societies/ organizations/ trusts with similar objects to open schools under the name of “Delhi Public School”, in and outside India. 120 schools were functioning under the name “Delhi Public School”, in and outside India. The main objective of assessee society was to establish progressive schools or other educational institutions in Delhi or outside Delhi, open to all without any distinction of race or creed or caste or special status, with a view to impart sound and liberal education to boys and girls. The assessee applied for exemption under Section 10(23C)(vi). The ADIT, rejected the assessee’s application seeking exemption, on the grounds that it had earned franchisee fee from the satellite schools in lieu of its name, logo and motto etc. which amounted to a ‘business activity’ with a profit motive. Further, no separate books of account were maintained by the assessee for business activity as required under Section 11(4A).

The Supreme Court held that the determining test to qualify for exemption under Section 10(23C)(vi) lies in the final motivation on which the institution functions, regardless of what extraneous profit it may accrue in pursuit of the same. On review of the assessee’s audited accounts, the surpluses accrued by the assessee society were being fed back into the maintenance and management of the assessee schools themselves. The assessee, thus fulfilled the requirements under Section 10(23C)(vi) to qualify for exemption. The assessee society was maintaining its 11 schools and the 120 satellite schools, in furtherance of the education purpose that also qualified as a ‘charitable purpose’ within the meaning of Section 2(15) and was not in contravention of Section 11(4A).

Profits & Gains from Business and Profession

  • Software expenses incurred by assessee to upgrade computer software which brought better efficiency in functioning of business was held as, revenue in nature

Principal Commissioner of Income Tax vs. Holcim Services (South Asia) Ltd. (93 271) (Bom.)


The assessee claimed expenditure incurred by it for purchase of software, as revenue in nature. The AO disallowed the claim by treating the same as capital expenditure. The Tribunal while deciding the matter in favour of the assessee had rendered a finding of fact that the software purchased by assessee brought about better efficiency in the business. The Tribunal had also recorded the fact that in view of fast changing technology, software had to be regularly updated, so as to keep pace with the changing technology.


In view of the above finding of facts as recorded by the Tribunal, the Bombay High Court held that the appeal filed by the Income Tax department did not give rise to any substantial question of law and therefore, dismissed the appeal.

  • Discount on price offered to retailers which is lower than the cost price cannot be considered as goodwill or brand value and loss on such transactions is not marketing intangible

Flipkart India (Pvt.) Ltd vs. ACIT (Bangalore ITAT) – 92 387


The assessee was engaged in the business of wholesale trading/distribution of books, mobiles, computers and related accessories. The assessee sold goods to retailers, at a price less than the cost price. The assessee had acquired goods from unrelated parties and sold the same to retailers, who subsequently sold those goods as sellers on internet platform under the name ‘’. During the year, the assessee in its tax return disclosed losses of Rs. 796 Crores. The AO opined that selling of goods at less than cost price was not a normal business practice and was a predatory pricing practice. The same was incurred to establish goodwill and brand value in the long run, to reap benefits in future years. The AO treated the losses incurred by the assessee as expenditure for creating marketing intangible asset and disallowed the same by treating it as capital expenditure.


  • The ITAT, relied on the judgement of Supreme Court in the case of CIT v. Calcutta Discount Ltd. [1973] 91 ITR 8, wherein it was held that transfer of goods at a price less than the market price cannot be tampered with by the tax authorities provided the parties to transaction are unrelated. This option is available to the AO only if Section 40(A)(2)(a) of the Act applies viz., where the parties to the transaction are related. There was no expenditure incurred by the assessee except those that are set out in the Profit and Loss Account. The question of incurring expenditure on creating intangibles does not arise for consideration at all. The ITAT held that the action of the AO in presuming that the assessee had incurred expenditure for creating intangible assets/brand or goodwill is without any basis. Even assuming that expenditure was incurred by the assessee, the expenditure for building brand or creating intangible or goodwill would be revenue expenditure, allowable as deduction.
  • Waiver of loan for acquiring capital assets cannot be taxed as perquisite under Section 28(iv)

  CIT vs. Mahindra and Mahindra Ltd (Supreme Court) – 93 32


The assessee had entered into an agreement with KJC, a company based in USA, wherein KJC agreed to sell the dies, welding equipment and die models to the assessee. For the procurement of the said tooling and other equipment, KJC agreed to provide loan to the respondent @ 6% interest, repayable after 10 years in installments. Subsequently, AMC, another company took over KJC and agreed to waive the principal amount of loan advanced to the assessee. The assessee wrote off the loan in their books. Considering the same as capital in nature, the assessee, in the tax return did not offer the same to income tax. The AO concluded that the waiver of loan amount was an income and not a liability. Accordingly, he made addition by treating the write off as income under Section 28(iv) of the Act.


 Section 28(iv) deals with taxing any benefit or perquisite derived from business or profession, in a form other than money. In the present case, the amount is considered as cash receipt, due to the waiver of loan and therefore, cannot be considered as a benefit or perquisite. The very first condition of Section 28(iv) is not satisfied, in the present case.

 As per provisions of Section 41(1), it is a sine qua non that there should be an allowance or deduction claimed by the assessee, in any AY in respect of loss, expenditure or trading liability incurred by the assessee. Since, no amount of loan was considered as deduction, nor had the assessee claimed deduction for interest payment. Thus, there was no cessation of a trading liability and accordingly, Section 41(1) will not apply.

Accordingly, it was held that waiver of loan would not be taxable in the hands of assessee as per Section 28(iv) or Section 41(1) of the Act.

  • Amendment in Section 40(a)(ia) by the Finance Act, 2010 is curative in nature and would apply retrospectively w.e.f. AY 2005-06.

Commissioner of Income-tax, Kolkata vs. Calcutta Export Company (93 51) (SC)


The assessee firm was a manufacturer and exporter of casting materials. The AO disallowed deduction of export commission paid by the assessee by invoking Section 40(a)(ia) of the Act. The assessee had deducted the TDS, but the payment thereof was made after the end of the previous year. The Tribunal as well as the High Court deleted the said disallowance by holding that amendment made by the Finance Act, 2010 in Section 40(a)(ia) is retrospective in nature.
The purpose for bringing the said amendment was to ensure tax compliance. The intention of the legislature was not to punish the assessee. It only shifted the year in which the expenditure can be claimed as deduction. The Finance Act, 2010 further relaxed the rigors of Section 40(a)(ia) to provide that all TDS, made during the previous year, can be deposited with the Government by the due date of filing the return of income. The idea was to allow additional time to the deductors to deposit the TDS so made. The Memorandum explaining the provisions of the Finance Bill, 2010 expressly mentioned that ‘This amendment is proposed to take effect retrospectively from 1st April 2010 and will, accordingly, apply in relation to the AY 2010-11 and subsequent years.’ The controversy surrounding the above amendment was whether the amendment being curative in nature should be applied retrospectively i.e., from the date of insertion of the provisions of Section 40(a)(ia) or should be applicable from the date of enforcement.
The Supreme Court held that the amended provisions of Section 40(a)(ia) should be interpreted liberally and equitably. Accordingly, the said amendment would apply retrospectively from the date when Section 40(a)(ia) was inserted i.e., with effect from the AY 2005-06.

  • Interest income from share application money ought to be set off against public issue expenses as it is inextricably linked with requirement of company to raise share capital.

CIT vs. Shree Rama Multi Tech Ltd. (403 ITR 426)(SC)

The assessee was engaged in the manufacture of multilayer tubes, other specialty packaging and plastic products. The assessee had come out with public issue during the year under consideration. The amount of share application money received was deposited by the assessee with the banks on which interest of Rs. 1.71 crores was earned. The assessee during the year had also incurred expenditure towards public issue. The AO taxed entire interest income in the hands of the assessee and did not allow set off of interest income against public issue expenses. The issue before the SC was whether interest accrued on deposit of share application money with the bank was taxable income at the hands of the assessee or could be set off against public issue expenses.
The SC observed that the assessee was statutorily required to keep share application money in the separate account, till the allotment of shares was completed. The interest earned was inextricably linked with requirement of the assessee to raise share capital. Where there is any surplus money which is lying idle and is deposited in the bank for the purpose of earning interest, then it is taxable as ‘income from other sources’. But where the income accrued is merely incidental and not the prime purpose of doing the act, which has resulted into accrual of some additional income, and then such income is not liable to be assessed separately. Such income to be first set off against expenditure incurred. Accordingly, interest accrued on share application money deposited with the bank was allowed to be set off against the public issue expenses.

  • Lease equalization charges from lease rental income are allowable deduction under Act. The assessee entitled to bifurcation of lease rental as per the Accounting Standard prescribed by the ICAI

CIT vs. Virtual Soft Systems Ltd. (302 CTR 65)(SC)

The assessee company filed its return of income for AY 1999-2000 declaring loss of Rs. 70.24 lakhs, after claiming Rs. 1.65 crores as deduction of lease equalization charges from lease rental income. The AO disallowed deduction of such lease equalization charges, on the ground that there is no express provision regarding such deduction in the Act. Where the Act is silent on allowability of certain items as deduction, it was obvious for the assessee to take recourse to Guidance Notes prescribed by the ICAI, if it was available. Only after applying such method which is prescribed in the Guidance Note, the assessee can show fair and real income which is liable to tax under the Act. A conjoint reading of Section 145 of the Act read with Section 211 of the Companies Act makes it clear that the assessee was entitled to do such bifurcation. There was no illegality in such bifurcation as it was according to the principles of law. The rule of interpretation says that when internal aid is not available then for the proper interpretation of the Statute, the Court may take the help of external aid. If a term is not defined in a Statute, then its meaning can be taken as is prevalent in ordinary or commercial parlance.
The SC held that assessee was entitled for bifurcation of lease rental as per the Accounting Standards prescribed by the ICAI. There is no express bar in the Act regarding the application of such Accounting Standards. There was no force in the contentions of the revenue that the Accounting Standards prescribed by the ICAI could not be used to bifurcate the lease rental to reach the real income for the purpose of tax under the Act.

Capital Gains

  • Amount received by retiring partner on retirement from firm on account of goodwill will not be subjected to tax as capital gains in his hands.

Principal Commissioner of Income-tax, Mumbai vs. R. F. Nangrani HUF (93 302) (Bom.)


The assessee was a partner in the firm namely Landmark Development. The assessee retired from the firm. As per the deed, it was mutually agreed between the retiring partners and continuing partners to pay a sum of Rs. 15 Crore to the assessee. While completing the assessment, the AO made an addition as long terms capital gain, in respect of the aforesaid amount.


The Mumbai Tribunal relying on various decisions, including decision of Supreme Court in the case of CIT vs. R. Lingamallu Rajkumar (247 ITR 801) and Bombay High Court in case of CIT vs. Riyaz A. Shekh (41 455) held that amounts received by a partner on his retirement from partnership firm are exempt from capital gains tax. The Income Tax department filed further appeal before the High Court.
The Bombay High Court held that the appeal filed by the Income Tax department does not give rise to any substantial question of law and therefore dismissed the appeal.

  • Section 56(2)(viia) of the Act would not be applicable where the Company has bought back its own shares, at price lesser than its book value

Vora Financial Services Pvt. Ltd vs. ACIT (ITA NO 532/Mum/2018)

The assessee made an offer to existing shareholders for buy back of 25% of its existing share capital at a price of Rs.26 per share. One of the directors offered certain shares under the buyback scheme. The AO noticed that the book value of shares as on 31st March of the preceding year was Rs.32.80 per share. The AO, assessed the difference between the book value of shares and purchase price of shares as income of the assessee under Section 56(2)(viia) of the Act.
Primary condition for invoking Section 56(2)(viia) is that the shares should become a property of the firm or a company, at a consideration which is lesser than fair market value. It follows that the shares should become ‘property’ of recipient company. In that case, it should be shares of any other company. It could not be its own shares because own shares cannot be become property of the recipient company.
The ITAT held that the assessee, in the instant case had purchased its own shares under buyback scheme. The same has been extinguished by reducing the capital and hence, the tests of “becoming property” and also “shares of any other company” fails. Accordingly, the AO was not justified in invoking the provisions of Section 56(2)(viia) for buyback of own shares.

Note: The ratio of this decision would apply equally in the context of the new Section 56(2)(x).

Purchases duly supported cannot be treated as Bogus

Pr. Commissioner Of Income Tax vs.Tejua Rohitkumar Kapadia – SC – Special Leave Petition (Civil) Diary No(S). 12670/2018 (

The Assessing Officer had disallowed purchases made of Rs. 5.19 crores made from Raj Impex by the assessee who is a trader, treating the purchases as bogus based on the findings of the Investigation Wing. The CIT(Appeals) allowed the appeal inter alia on the ground that all payments were made by the assessee by Account Payee cheques and there were corresponding sales in respect thereof. On appeal by the Department, the Tribunal dismissed the same on the ground that the purchases are duly supported by bills, all payments are made by account payee cheques, the supplier has confirmed the transactions, there is no evidence to show that the purchase consideration has come back to the assessee in cash, the sales out of purchases have been accepted and the supplier has accounted for the purchases made by the assessee and paid taxes thereon. The Gujarat High Court dismissed the Departments appeal holding that no question of law arose in view of the above findings which were accepted by the Department. The SC dismissed the SLP filed by the Department.


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