Domestic and Direct Tax Updates

Supreme Court in India lifted the extension granted in limitation period

In March 2020, Hon'ble Supreme Court had taken suo motu cognizance of the difficulties that might be faced by litigants in view of the outbreak of Covid-19 global pandemic, in filing petitions, applications, suits, appeals and in all other proceedings within the period of limitation prescribed and accordingly, directed extension of the period of limitation in all proceedings before the courts and tribunal until further orders. While Hon’ble Supreme Court had lifted this extension for a brief period in the month of March 2021, the original order in the month of March 2020 for extension of period of limitation was restored in the month of April 2021, in view of surge of Covid-19 cases in second wave.

Now, considering the normalcy being restored with reduction in Covid-19 cases, the Hon'ble Supreme Court has lifted the extension granted.

The counting of limitation period has again started from 3 October 2021, and in computing the limitation period for any suit, appeal, application or proceeding, the period from 15 March 2020 till 2 October 2021 shall stand excluded.

Consequently, balance period of limitation remaining as on 15 March 2020, if any, shall become available with effect from 3 October 2021.

In certain specified matters, where the limitation period would have expired during the period between 15 March 2020 and 2 October 2021, notwithstanding the actual balance period of limitation remaining, a limitation period of 90 days from 3 October 2021 shall apply. In the event, the actual balance period of limitation remaining w.e.f. 3 October 2021 is greater than 90 days, that longer period shall apply.

While it is appealing to hold a position of directorship in a company, legislations in India impose various liabilities on directors of a company for any wrongdoing by the company, from an accountability perspective. Section 179 of the Act deals with liability of directors of private company in liquidation. It imposes joint and several liabilities on every director of a private company for recovery of tax dues, in case the same are not recoverable from the company. However, the rigours under Section 179 do not apply in case the concerned director is able to demonstrate that non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.

In this context, the Delhi High Court has recently held that even in a situation where the directors of the company enter into an inter-se agreement for settling their respective rights and obligations upon entry/exit of any of the directors of the company, such an arrangement would not have a bearing on the right conferred on the tax department under section 179 to recover the tax dues from such director, who has relieved himself from obligation of any tax dues under the inter-se agreement.

• Court noted the provisions of Section 179(1) and observed that the section has to be interpreted rigidly which imposes a vicarious responsibility on the directors for the dues of the company. It stated that the Revenue has to give a finding that the tax dues could not be recovered from the company before proceeding against the director. Court held that the burden is on the director to prove that the non-recovery was not due to his gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company. 
• Court remarked that agreement such as inter-se agreement govern rights ‘against a specific individual’ and cannot bind a statutory authority while concluding that private parties cannot apportion Income Tax liability by private agreement.  
• Upon Section 179 becoming applicable, the directors would step into the shoes of the company as an Assessee for the purposes of payment of all taxes due under the Act from the company. Thereafter, the provisions of the Act, specifically those relating to recovery would apply on the director, as they were applied on the concerned company.

In view of the above, utmost precaution and care needs to be exercised by any person being appointed as a director in the strategic as well as day-to-day affairs of the company.

Depreciation for iPads restricted to 15 per cent

The depreciation for computers was available at higher rate of 60 per cent.  The same had been capped at 40 per cent effective 1 April 2017 (i.e. Financial year 2017-18 onwards).  Whether a particular device can be regarded as ‘computer’ eligible for higher rate of depreciation has  been a matter of debate. There are contrary rulings on the matter.

Amritsar Bench of the Income Tax Appellate Tribunal (‘ITAT’) has held that iPad is a communicating device and cannot substitute computers in spite of having some common features due to the following:

• In absence of definition of computer, the predominant function, usage and common parlance understanding, would have to be taken into account to determine whether a particular machine can be classified as a computer or not.  
• Any ambiguity in the exemption clause must be conferred in favour of revenue and such exemption should be allowed to only those claimants who demonstrate that a case for exemption squarely falls within the parameters enumerated and that all the conditions
  precedent for availing exemption are satisfied. 
• In the case, the predominant purpose of iPad was communication and not a computing device, though it is capable of discharging some of the functions of computers.  
• Further, Apple stores do not sell iPad as a computer device, rather they sell it as a communicating/ entertainment device.

Accordingly ITAT held that iPads do not qualify for higher rate of depreciation of 60 per cent (now, capped at 40 per cent) as a computer under the Act but are eligible for 15 per cent depreciation.

Important Notifications and Circulars issued during the quarter

1. Government notifies the Taxation Laws (Amendment) Act, 2021 and consequential Rules for withdrawal of retrospection taxation of indirect transfers

Explanation 5 to section 9(1)(i) was inserted by Finance Act, 2012 to retrospectively tax indirect transfers involving shares or interest in a company or entity registered outside India that derive its value substantially from the assets located in India either directly or indirectly The Government of India has notified the Taxation Laws Amendment Act, 2021 on 13 August 2021 to amend the above provision.

It provides that the tax demand raised by applying above retrospective amendment to offshore indirect transfer of Indian assets made before 28 May 2012 shall be nullified on fulfilment of specified  conditions. The amount paid/collected in these cases shall be refunded, without any interest, on fulfilment of the said conditions.

Consequentially, the Indian government has also notified draft rules to operationalise the above provisions and have sought comments from stake holders before issuance of final rules specifying various operational aspects such as conditions in order to be eligible to claim relief, form and manner of furnishing the undertaking for withdrawal of pending litigation, claiming no costs, damages.

2. Central Board of Direct Taxes (‘CBDT’) notifies Rule 9D for calculation of taxable interest on Provident Fund contributions

Section 10(11) and 10(12) of the Act,  provide for tax exemption to payment from statutory provident fund and recognized provident fund. Finance Act, 2021 has restricted such exemption in respect of the interest income accruing to the person making such contributions on the amount of contribution made by the person exceeding INR 250,000 / INR 500,000 as the case may be, computed in the prescribed manner.

Vide Notification No. 95/2021 dated 31 August 2021, the CBDT has inserted Rule 9D in the Income Tax Rules, 1962 (‘Rules’), for calculation of such taxable interest on contribution in a provident fund or recognized provident fund exceeding specified limit.

Rule 9D, which comes into effect from 1 April 2022 (i.e. from FY 21-22), provides for maintenance of separate accounts within the provident fund account, during the previous year 2021-22 and all subsequent previous years, for contribution on which interest is taxable and contribution on which interest continues to be exempt.

The contribution account, interest on which would continue to be exempt, shall be the aggregate of:

• Closing balance in the account as on 31 March 2021;
• Any contribution made during the previous year 2021-22 and subsequent previous years apart from the contribution made in taxable account; and
• Interest accrued thereon as reduced by the withdrawal.

Similarly, the contribution account, interest on which would be taxable, shall be the aggregate of:

• Contribution made during the previous year 2021-22 and subsequent previous years, in excess of the threshold limit (being: INR 500,000 where there is no employer’s contribution and INR 250,000 in other cases); and
• Interest accrued thereon, as reduced by the withdrawal.

3. CBDT extends various time limits under Income Tax Laws 

Considering the genuine hardship faced by the tax payers due to Covid-19, CBDT has extended various time limits under the Act.

The detailed article in relation to extension of due dates to file the Income-tax returns and Tax Audit Reports for Financial Year (‘FY’) 2020-21 can be accessed. For further details Read more »