Disallowances in case of Interest free loans given by a company to a sister concern or others

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In this regard it is pertinent to note that it is a well settled law that notional incomes are not taxable under the Income Tax Act, 1961. The Orissa High Court in the case of Tripty Drinks Pvt. Ltd. (1978) 112 ITR 721 held that, the profits that are charged under the Act are real profits and those which are regarded as profits in the commercial world. No tax may be levied on fictional or notional profits.

Therefore, no notional interest on such advances shall be taxable in the hands of the company making advances to its sister concern or others. However, if the advances are made without any business purpose and out of borrowed funds than proportionate interest paid or payable on such borrowed funds shall be disallowed.

The Delhi High Court in the case of Punjab Stainless Steel Industries (2010) 41 DTR 289 has held that, if the assessee failed to make out a case of commercial expediency in advancing interest free advances to its sister concern which where made from its CC account with a bank, proportionate interest paid by assessee on borrowing was rightly disallowed.

In yet another case, the Punjab & Haryana High Court in the case of Abhishek Industries Limited (2006) 286 ITR 1 has held that once it is borne out of record that the assessee has borrowed certain funds on which liability to pay tax is being incurred and on the other hand certain amounts has been advanced to sister concerns or others without carrying any interest or without any business purpose, the interest to the extent the advance has been made without carrying any interest is to be disallowed u/s 36(1)(iii).

However, the Chhattisgarh High Court in the case of Beekay Eng. Corporation (2010) 38 DTR 289 has held that, where there were sufficient funds of partners in the opening balance and sufficient profit has been earned during the year and no borrowed funds diverted as interest free funds to the sister / associate concerns. The assessing officer cannot disallow a part of the interest paid on the funds borrowed by the assessee.

Therefore, in my view, under following two circumstances the disallowance of the proportionate interest on borrowed capital can be negated:

1) If the commercial expediency for advancing loan can be proved.

2) If the advances are made out of profits. This can only be proved if the company has huge reserves and profits. Also, it is important that there should not be any direct nexus between the funds borrowed and the advances made.

CBDT Clarification on Tax Scrutiny Of Mergers and Acquisitions Cases

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The Central Board of Direct Taxes (CBDT) has clarified that the Income Tax Department is currently scrutinizing only a handful of cases relating to takeovers, mergers and acquisitions; not 380 or 100 as reported in some sections of the media. Tax scrutiny is an ongoing process and the numbers vary from year to year. This has already been stated in replies to several Parliament Questions

The Income Tax Department reposes trust in taxpayers. It scrutinizes about 1 percent of its total taxpayer base. Selection of cases for scrutiny is risk-based and non-intrusive. Besides, some cases are scrutinized following intensive tax investigation, such as surveys, search and seizure. Mere incidence of takeover, merger and acquisition does not qualify a case for tax-scrutiny. The overall scrutiny level by the Income Tax Department has never exceeded 1.5 percent in the last decade.

Parameters for processing of E-TDS Returns

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Parameters for processing of E-TDS Returns – issuance of instruction – regarding

INSTRUCTION NO. 8/2010 [F.NO. 275/73/2009-IT(B)]

DATED 8-12-2010

1.In the present system of processing of e-TDS returns, the returns are processed online and mismatch report showing defaults on various accounts is generated. Based on this mismatch report, the assessing officers issue show-cause notices to the deductors and take follow up actions.

2. It has come to the notice of the Board that substantial number of TDS returns are pending where the deductee-wise default on account of short deduction of tax is less than Rs. 10.

3. This issue has been considered by the Board and it has been decided that:

(i) where the default on account of short deduction is less than Rs. 10 for each deductee, the demand is round off to zero; and

(ii) after considering (i) above, deductor-wise demand/default, if any, of Rs. 100 or less will also be ignored for further action.

4. However, the DDOs in such cases may be warned to be careful in future so as to ensure that they do not become habitual in short deduction of tax.

5. Earlier Instruction No. 11/2007, dated 18-12-2007 issued under F. No. 385/56/2007-IT(B) on the subject stands superseded by this instruction.

6. These instructions shall apply to all TCS/TDS cases under all Direct Tax Enactments. These instructions will come into force immediately.

Last minute tax planning? Here is a quick guide!

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Do you find yourself in a situation where there are just a bunch of days ahead for the deadline of submission of tax documents? Here is a quick guide to help you sort out your finances last minute!

1. Target full utilisation of Section 80 C: Maximum deduction available is to the tune of Rs. 100,000. Assess your income to arrive at the amount you need to invest in this section. The investment avenues include; Public Provident Fund (PPF) up to Rs. 70,000, National Saving Certificate (NSC), Life Insurance or ULIP premium, tuition fees paid for children's education (2 children max), Equity linked savings schemes (ELSS), Post office saving deposit (POSD) and five year fixed deposits with banks among others.

For individuals in the higher income bracket, section 80 C which is the most popular one may not be sufficient to reduce overall tax liability. Here is where the other sections will play a key role in reducing tax outflow.

2. Interest on home loan: Individuals intending to buy a house should consider opting for a home loan. Interest payments up to Rs 150,000 pa are eligible for deduction under Section 24

3. House Rent Allowance (HRA): You can take advantage of this if you are renting an accommodation. There are set guidelines determining the amount deductible. Please note that the rent agreement and the rent receipts need to be submitted

4. Health Insurance Premium: Annual deduction of Rs. 15,000 is permissible for self, spouse and dependent children. Also and additional Rs. 15,000 is allowed for parents

5. Medical reimbursement: Medical treatment expenses up to Rs. 15,000 can be claimed annually as deduction from salary u/s 17(2). Actual bills need to be produced

6. Donation to Charitable institutions: Subject to the stated limits, donations to specified funds/institutions are eligible for tax benefits under Section 80G. Receipt needs to be produced.

7. Interest paid on educational loans: Deduction can be claimed on interest paid on educational loans taken for higher education of you, your spouse and children under section (u/s) 80 E. There is no limit on the amount of deduction you can claim. However, the loan should be taken for a graduate or post-graduate program in engineering, medicine or management or a post-graduate course in the pure or applied sciences

No tax on additional interest on EPF money (diff. of 9.5 and 8.5 %)

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The additional quantum of interest on employees Provident Fund deposits would be exempted from income tax, the Lok Sabha was informed today. The provident fund trustees had on September 15 decided to raise the EPF interest rate by 1% to 9.5 for 2010-11.

However as per income tax rules interest on EPF is exempted only upto 8.5 % only. So as per present rule though the interest payable is 9.5% but interest exempted is only 8.5% means additional 1 % is taxable in employee's hand .But now in Lok sabha Govt has declared that in rate given in income tax for exemption for interest on EPF will also be increased to 9.5 %.

"The matter has been discussed with Finance Ministry and they have informed that they will revise the notification to 9.5% once it is approved by the Government," Minister of State for Labour and Employment Harish Rawat said in a written reply. The decision taken by the Central Board of Trustees of EPF to raise the interest rate would benefit 4.71 crore employees in both public and private sectors.

Implementation of the new application Software for MPCTD

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After series of modifications, amendments, incorporation of changes to bring the application software in consistence with the latest amendments in rules & Act, and to facilitate taxpayer of state with more citizen centric features, the application software went go-live on July 2010. Tata Consultancy Services Ltd (TCS) has customized and implemented their Value Added Tax Information System (VATIS) framework in state. The application software is helping the department to actualize its mission. Facilities include static and dynamic information, online registration, e-filing of return, payment of taxes, online request management, status self-tracking and direct downloading of statutory form 49, will be available to the registered dealers/taxpayers.

Receipts forming/not forming part of total turnover for Presumptive Taxation

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Receipts forming part of Turnover	Receipts not forming part of Turnover
1. Sales tax or any other levy	1. Advances or deposits received.
2. Sale of unusables, empties and packages	2. Consideration received on sale of fixed assets employed in the business.
3. Service charges charged for delivery may form part of turnover, having regard to terms of contract.	3. Any security or other deposit obtained from employees.
	4. Interest and any other receipts of similar nature.
	5. Incentive received from the suppliers, cash or other discount received on purchase should not form part of turnover.
	6. Value of stock in trade.