sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
Latest Expert Exchange
Sales Tax »
 Clarification on Cash sale of agricultural produce by Cultivators/Agriculturists
 Short-term capital gains are taxable at income tax slab rates in the year of sale
 India imposes regressive nationwide sales tax
 Modification of Circular No.1 of 2014 in view of substitution of Service Tax by Goods and Services Tax (GST).
 Assam government to dismantle all sales tax check-gates post Goods and Services Tax
 Income tax: How to calculate capital gains tax on sale of old jewellery
 Six arrested for posing as Sales Tax officers, extorting money
 Insurance Agency Mergers and Acquisitions in Q1 "Explode," OPTIS Partners' Report Reveals
 Sales tax sleuths raid spare parts shops in Meerut's infamous Sotiganj market
 Income Tax: How offshore income could be taxed twice
 India finalises bills to launch new sales tax in July

Holding companies & HNIs can lower tax with higher deductions
March, 04th 2016

Many holding companies of business groups, corporates and MNCs with subsidiaries, and even individuals investing in stocks are awaiting a new 'rule' that would allow them to lower tax outgo. The finance minister, in his Budget speech, has announced a change in a specific rule which, according to tax professionals, would allow higher deductions and lower taxable income. According to tax laws, if an assessee earns income that is not chargeable to tax, then the corresponding expenditure for earning such exempt income is not permitted as deduction.

Thus, an investment holding company or a corporate receiving dividend income — which is not taxed in the hands of the receiver — cannot deduct the interest cost on borrowings and administrative expenses to reduce tax burden.

But since many equity investments do not generate dividend, companies have been insisting that costs on borrowing and administration should be allowed as deduction. The Income-tax department has been denying this on the grounds that such investments, though not yielding any dividend today, are capable of earning dividend in future. The difference in opinion has led to several disputes between companies and the tax office.

In fact, tax professionals said about 20% of the corporate litigation is about disallowance under section 14A — the related Section in the Incometax law — due to differences in interpretation.

Consider this. A company borrows Rs 10 crore at the rate of 10% to invest in four stocks — worth Rs 2.5 crore invested in each; of the four stocks, only one generates dividend income of say, Rs 1 lakh. The company has an administrative expense of Rs 5 lakh and its 'other income' from interest, royalty, and capital gains, is Rs 5 crore. The company believes that its total taxable income isRs 3.95 crore, which is other income of Rs 5 crore net of interest cost and administrative expense ofRs 10,500,000. But based on the total assets of the company (say, Rs 12 crore here), the tax department claims tax on an additional income of Rs 85 lakh.

Thus, to the taxman, the company's total taxable income is Rs 4.75 crore, and not Rs 3.85 crore as offered by the company. The formula used by the tax officer to arrive at the taxable income is based on the total interest cost, investment in shares earning tax-exempt income, and total assets of a company. The finance minister has proposed that the particular rule (Rule 8D) will be amended and disallowance of deductions will be limited to 1% of the average value of monthly investments yielding exempt income. In the above example, this investment is valued at Rs 2.5 crore (because only one out of four stocks is generating dividend income).

"Almost every holding company which has invested in subsidiaries are facing disallowance under section 14A of the I-T Act — which means they cannot treat the interest on borrowed money and some of the other expenses as deductible. Now, these expenses will be allowed as deductions even if the investments are not earning any dividend. Holding companies such as Tata Sons is expected to have a substantial gain," said senior chartered accountant Dilip Lakhani.

As per the Budget announcement, starting next year the tax department can make an addition of only Rs 2.5 lakh (i.e, 1% of Rs 2.5 crore) — not Rs 85 lakh as it would have otherwise done. Thus, the taxable income of the company would be Rs 39,750,000, which is only Rs 2.5 lakh higher than the amount ofRs 3.95 crore that the company had offered to tax.

Home | About Us | Terms and Conditions | Contact Us
Copyright 2018 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Portal Design Website Design Portal Designing Website Designing Web Design Professional Portal Design Professional Website Design Professional Web Design Portal Design India Website Design India Portal Designing India Website Designing India Web Design India Professional Portal Design India Professional Website Design India Chicago Professional Web Design New York Professional Web Design California Website Design Florida Website Design New Jersey Website Design Britain UK Website Design London Manchester Website Design

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions