The Income tax Act, 1961
1. The principal-shareholder/director of a company should not be regarded as beneficially holding shares carrying 51% voting power in closely-held subsidiary.
TAINWALA TRADING AND INVESTMENTS CO. LTD. v. ACIT [2012]
Facts
Here the assessee (a closely held co.) claimed set off of brought forward business loss of Rs. 64.11 lakh for assessment year 1998-99 against the income of the relevant year (assessment year 2006-07). In1998 M/s. Concept Reality & Securities Limited held 58.12% shares of the total capital.
It was noticed that the said M/s. Concept Reality & Securities Limited did not hold even a single share in the company as on 31st March, 2006. The shares are transferred to Mr. D.Ramesh Tainwala who was director of M/s. Concept Reality & Securities Limited.
Held
The shareholding of M/s. Concept was reduced to nil as on 31st March, 2006 as against more than 51% of the shareholding of the assessee company as on the year ending 31-3-1998, the necessary condition for invoking the provisions of section 79 was rightly activated. Disallowance u/s 79 upheld
Observations:
I. A company is a separate legal entity distinct from its shareholders. It is impermissible to argue that the assets of a company are assets of the shareholders, except in the case of its liquidation and that too, to the extent of the amount remaining after the discharge of outside liabilities.
II. If the shareholders of the company are treated as one and the same thing as is a company, then the very concept of separate legal entity comes to naught. A person is said to be a beneficial owner of shares when they are held by someone else on his behalf, meaning thereby that the registered owner is different from the actual or the beneficial owner.
III. Where the shares are not so held by one for and on behalf of another, the concept of beneficial ownership cannot be invoked.
Income Tax Act, 1961.
2. Bad debts in excess of provision for bad debts debited by assessee, covered under section 36(1)(viia), to P & L account is deductible under section 36(2)(v)
ACIT V. KERALA STATE INDUSTRIAL DEVELOPMENT CORPORATION LIMITED(2012)
Facts:
The assessee-company, a Kerala Government undertaking, engaged in the business of providing financial assistance to industrial projects and eligible for deductions in respect of provision for bad debts under section 36(1)(viia) and write off of bad debts under section 36(2). The assessee-company debited Rs. 1,81,00,000/- to provision for bad debts account since balance in that account was only Rs. 1,81,00,000/-. The remaining bad debts of Rs. 5,70,13,359/- was debited directly to P& L account and assessee-company claimed total bad debts of Rs. 7,51,13,359/- as deduction.
AO disallowed the amount, which was debited to P & L account under section 36(2)(v) since section 36(2)(v) provides that "……., no such deduction shall be allowed unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful debts account made under that clause"
Held:
CIT(A)'s decision of allowing assessee's claim upheld by ITAT
Observations:
Under the accounting principles, the provision account can only have credit balance and on account of making debits in that account, if the said provision account is converted into a debit balance account, then the Provision account has to be closed by transferring the debit balance to the Profit and Loss account.
Accordingly, even if the assessee had debited the entire bad debts amount of Rs. 7.51 crores to the Provision account, then the Provision account will show a debit balance of Rs.5.70 crores which would have been closed by transferring it to the Profit and Loss account. Instead of following this circuitous methodology, the assessee debited the Provision account with the available balance of Rs.1.81 crores and debited the Profit and Loss account with the remaining balance. The net effect of both the methodologies gives same end result.
No comments:
Post a Comment