Risk

The quantifiable likelihood of loss or less-than-expected returns. 

Examples: currency risk, inflation risk, principal risk, country risk, economic risk, mortgage risk, liquidity risk, market risk, opportunity risk, income risk, interest rate risk, prepayment risk, credit risk, unsystematic risk, call risk, business risk, counterparty risk, purchasing-power risk, event risk.

Even statutory reserve created by NBFC was to be added back for computing book profits for MAT purposes

SREI Infrastructure Finance Ltd. v. ACIT - [2015] 54 taxmann.com 254 (Delhi High Court)

For the purpose of section 115JB, reserve required to be created by NBFC under the RBI Act is to be treated in a similar manner as other reserves. Such reserve is out of the profits earned by a NBFC and it is not an amount diverted at source by overriding title. Thus, statutory reserve created by NBFC is to be added back to book profits computed under Section 115JB.

Facts:

• Assessee was a NBFC engaged, interalia, in the business of leasing of commercial vehicles and financing of infrastructure project equipment's. It had created a special reserve under the RBI Act. The AO added back the amount of said reserve to Book profit computed under section 115JB.
• The CIT(A) and the Tribunal affirmed the finding of AO. The contention of the assessee was two-fold. Firstly, the reserve created as per the mandate of Section 45-IC of the RBI Act was, in fact, a liability and not a reserve. Secondly, it did not have any title over the reserve and, therefore, it was a case of diversion of income at source. 
• The aggrieved-assessee filed the instant appeal before the High Court.

The High Court held in favour of revenue as under:

• Explanation 1 to Section 115JB provides that "book profit" shall be increased by the amounts carried to any reserves, by whatever name called [other than a reserve specified under section 33AC]. The word "any" refers to all kinds of reserves and encompasses all types and categories without any exception. Only reserves specified in section 33AC of the Act have to be excluded from computing book profit.
• The reserve which is required to be created under the RBI Act, is out of the profits earned by a non-banking financial institution. It is not an amount diverted at source by overriding title. 
• Such reserve of not less than 20% of net profit can only be computed after net profit is calculated and computed. Reserve so created is not a liability known or ascertained, even estimated. Hence, it can neither be diversion of income at source nor an expenditure or liability.
• Section 45-IC ensures that a NBFC does not appropriate entire net profit as disclosed in the Profit and Loss account but this percentage is either ploughed back into business or is represented by a portion of the asset. 
• It is an added measure of protection created by the statute to prevent defaults by the NBFCs. Section 45-IC of the RBI Act also permits appropriation but in restricted or controlled manner by a NBFC. 
• Hence, statutory reserves required to be created by NBFC under section 45-IC of the RBI Act was to be added back for computing book profits under section 115JB.6)

Fee charged for late filing of TDS return isn't a tax; High Court upholds constitutional validity of section 234E

Rashmikant Kundalia v. Union of India (2015) 54 taxmann.com 200 (Bombay High Court)

The fee sought to be levied under section 234E is not a tax that is sought to be levied on the deductor. The provisions of section 234E is not onerous on the ground that the section does not empower the AO to condone the delay in late filing of the TDS return, or that no appeal is provided for from an arbitrary order passed under section 234E

Facts :

• Petitioner, a practicing Chartered Accountant, challenged the constitutional validity of section 234E. Section 234E seeks to levy a fee of Rs.200/- per day (subject to certain other conditions) inter-alia on a person who deducts Tax at Source and then fails to deliver or cause to be delivered the TDS return to the authorities within the prescribed period.
• He argued that legislature had categorically termed the levy under section 234E of the Act as a "fee", it necessarily could be levied only in the event the Government was providing any service. In the absence thereof, the said section seeks to collect tax in the guise of a fee. This, according to the learned counsel, was impermissible either in common law or under the taxing statute, and encroached on the rights of life and liberty of the citizens. 
• He further submitted that the provisions of section 234E were extremely onerous as the AO was not vested with any power to condone the delay in filing the TDS return and there was also no provision of appeal against order of AO.

The High Court upheld the constitutional validity of Section 234E and made following observations:

• There is an obligation on the Income Tax Department to process the income tax returns within the specified period. Department cannot accurately process the return until information of TDS is furnished by the deductor within the prescribed time.
• If the income tax returns having refund claims were not processed in a timely manner, it would result in delay in issuing refunds or raising of infructuous demands. Late payment of refund also affects the government financially as the Government has to pay interest for delay in granting the refunds. 
• The Legislature took note of the fact that a substantial number of deductors were not furnishing their TDS returns within the prescribed time frame which was absolutely essential. This led to an additional work burden upon the Department due to the fault of the deductor by not furnishing the TDS returns in time. It was in this backdrop, and to compensate for the additional work burdened upon the Department, that a fee was sought to be levied under section 234E. Thus, section 234E is not punitive in nature but a fee which is a fixed charge for the extra service which the Department has to provide due to the late filing of the TDS statements. 
• A right of appeal is not a matter of right but is a creature of the statute, and if the Legislature deems it fit not to provide a remedy of appeal, so be it. Even in such a scenario it was not as if the aggrieved party was left remediless. Such aggrieved person could always approach this Court in its extra ordinary equitable jurisdiction under Article 226 / 227 of the Constitution of India, as the case may be. Therefore, we do not agree with the argument of the Petitioners that simply because no remedy of appeal was provided for, the provisions of section 234E were onerous.

Cap Rate

The discount rate used to determine the present value of a stream of future earnings. Typically this will be an appropriate risk-free return plus a premium to reflect the risk of that specific investment.

Receipts from capacity 'sale' of telecom cable link with transfer of ownership isn't taxable as 'royalty': ITAT

Flag Telecom Group Ltd. v. DCIT - (2015) 54 taxmann.com 154 (Mumbai - Tribunal)
 
What is envisaged in section 9(1)(vi) read with Explanation thereto, is consideration for use or rights to use of any equipment. If consideration was received by foreign company for sale of capacity involving transfer of ownership of cable system to Indian Company as distinguished from a mere payment for simply user of capacity, the consideration would not be taxable as royalty.

Facts :

• The assessee-company was incorporated in Bermuda, from where it was managed and controlled. Since, India does not have any tax treaty with Bermuda, therefore, the Income Tax Act was applicable.
• It was set up to build fibre optic cable system to increase the telecommunication traffic between and among Western Europe, Middle East, South Asia, South East Asia and Far East. 
• Assessee had entered into Memorandum of understanding (MOU) with 13 parties for the purpose of planning and implementation of the said Fibre optic Cable System. Videsh Sanchar Nigam Limited ('VSNL') was one of the original landing party to the MOU. For the purpose of selling the capacity in the cable system, Cable Sales Agreement (CSA) was entered into amongst the parties. 
• The assessee had sold the capacity to VSNL for USD 28,940,000. The CSA provided for the ownership rights in the Cable System with all the rights and obligations in the capacity cable.

The issue that arose for consideration of Tribunal was:

Whether the amount of US $ 28,940,000 was taxable in the hands of assessee as royalty income-tax Act?

The Tribunal held in favour of assessee as under:

• The entire agreement was for the period of 25 years which coincided with the life of the cable. In the agreement there were clear cut clauses for the ownership.
• One of the clauses of agreement clearly envisaged that the net proceeds on disposition of the cable system would be shared amongst the signatories in proportion to their ownership rights. 
• Not only that, there was right to assign the capacity, which was borne out from the fact that purchaser of the capacity could sell or grant right to use the capacity in the cable system to some other party. 
• All this clearly indicated that the signatory would become the owner of the capacity in the cable system after the purchase, that is, the VSNL in the instant case. 
• This fact further establishes that there was no payment for simply user of the capacity. In case of a 'royalty', agreement, the complete ownership is never transferred to the other party. What is envisaged in section 9(1)(vi) read with Explanation thereto, is that there should be transfer of rights of any kind of the property as defined therein; or imparting of any information in respect of various kinds of property; or use of rights to use of any equipments, etc. 
• If the consideration was received for transferring the ownership with all rights and obligations then such a consideration could not be taxed as 'royalty'.

Collateral

Assets pledged by a borrower to secure a loan or other credit, and subject to seizure in the event of default, also called security.

CIT can't consider violation of provisions of section 13 while granting registration to a trust

Kul Foundation v. CIT (2015) 54 taxmann.com 143 (Pune - Tribunal)

Provisions of section 13 couldn't be applied to deny registration to a trust or an Institution under section 12A - It shall be applied to decide deduction to be allowable to a trust or an Institution while completing assessment proceedings.

Facts :

• In the instant case, one of the objects of the trust was limited to the benefit of Jain community;
• The CIT contended that trust had violated provisions of section 13(1)(b) since benefits of sections 11 and 12 could not be extended to the charitable trust or institution which was established for the benefit of any specific religious community. Hence, he denied registration to trust under section 12A.

Issue:
The issue that arose for consideration before the Tribunal was:
"Whether the CIT has erred in denying the trust registration under Section 12A holding that the object clause of the Trust Deed is specifically for the benefit of the Jain Community which is a specific religious community and hence attracts the provisions of sec.13(1)(b)?"

The Tribunal Held in favour of assessee as under:

• In order to avail of the deduction under sections 11 and 12 of the Act, the trust or institution has to make an application for registration under section 12AA of the Act;
• The CIT after satisfying himself about the objects of the trust or Institution and about the genuineness of its activities, had to pass an order in writing granting or refusing the registration; 
• The Assessing Officer had to consider non-fulfillment of the conditions laid down in section 13(1)(b) during assessment procedure while allowing deduction under sections 11 and 12 to the trust or Institution; 
• Therefore, the CIT was not authorized to consider violation by the trust or Institution on account of provisions of section 13(1)(b) while granting it registration under section 12A.