Sec 50C not applicable to transfer of 'tenancy rights'

Sec 50C applicable only to transfer of capital asset being land or building or both; Sec 50C cannot be invoked where tenancy rights or leasehold rights in land or building are transferred; Consideration received for transfer of ‘tenancy rights’ cannot be treated as consideration for ‘ownership rights’ only because payment was made at the time of sale of property by owner   : Kolkata ITAT

The decision was pronounced by ITAT bench of Shri Pramod Kumar and Shri Mahavir Singh.

A Mumbai bench of ITAT, in the case of Atul Puranik [TS-197-ITAT-2011(Mum)], has held that Sec 50C is not applicable to the transfer of ‘lease rights’ in land. ITAT observed that Sec 50C, being a deeming provision, would be applicable only for transfer of land and building and not in respect of any ‘lease rights’ in land or building. As per sec 50C, while computing capital gains, a higher stamp duty value can be substituted for actual ‘sales price’ in case of transfer of land or building.

Tejinder Singh [TS-121-ITAT-2012(Kol)]

ECB suspends Greek debt as collateral following S&P downgrade

The ECB has temporarily suspended Greek debt for use as collateral following S&P yesterday cutting the country's credit rating to Selective Default from CC. S&P made its move after Athens launched a bond swap to lower its debt burden and inserted retroactive collective action clauses (CAC) into its loans. "The effect of a CAC is to bind all bondholders of a particular series to amended bond payment terms...and (it) materially changes the original terms of the affected debt," S&P said.

Moody's warns on Japan

 Moody's said it will review Japan's credit rating if the country's plans to double its sales tax are delayed any further. For the time being, Moody's doesn't plan to change Japan's Aa3 rating with a stable outlook because the country's current account surplus helped offset its public debt.

No surprises from U.K., German GDP

 The latest figures put the U.K.'s Q4 GDP at an unrevised -0.2%, with the year-on-year figure revised down slightly to +0.7% from +0.8%. The full-year 2011 GDP was +0.8%. In Germany, figures were similarly unchanged from preliminary estimates. Q4 GDP was an expected -0.2% M/M, a contraction the government termed a "little setback." On a year-on-year basis, price-adjusted GDP was +1.5% for Q4, and +2% in calendar-adjusted terms.

Yen Under Pressure While Euro Remains Resilient

  Euro gains on Dollar

  Euro hits a 2 and a half month high, while Japan's  Yen drops to its lowest point against the US  Dollar  in seven months.

  Today, the Euro rose to a 2 and a half month high  against the Dollar. The rise was as a result of  the German IFO institute's survey. The survey results  beat forecasts and raised expectations that Germany,  Europe's largest economy, would escape a recession.

  The Munich-based IFO think tank declared that its  business climate index, based on a monthly survey of  some 7,000 companies, had risen to 109.6 in February,  beating expectations of 108.8. This figure is at its  highest level since July 2011 and marks the fourth  increase in a row.   

  While the Euro had earlier started to climb on market  speculation of a strong IFO number, it jumped to  $1.3330 on release of the survey.

  The Japanese Yen dropped to a new 7-month low  against the US Dollar, while the Euro remained  strong amidst fears of slipping into recession.

  Key support levels continue to give way which in  turn encourages more Yen selling. As a result, the  Euro rose to a 3-month high against the Yen.

Eurozone headed for recession.

 The European Commission now forecasts a mild recession for the eurozone, with the region shrinking 0.3% this year. As recently as November, the EC had expected 0.5% growth this year. One of the sharpest country revisions is for Spain, now expected to contract 1% vs. prior forecast of +0.7%. Euro +0.4% to $1.3293.

FCCB Conversion Risk

Foreign Currency Convertible Bonds (FCCBs) are hybrid debt instruments. Thus, they present a cheap option for corporates to raise money in overseas markets. However, with stock prices of many companies falling below the conversion price, these corporates are facing a huge redemption risk now. In fact, as per Fitch reports, at least 20% of the FCCBs due for conversion are likely to default this year. Rupee depreciation and falling stock prices have increased the default risk. 
In order to avoid default, some corporates have restructured the FCCB debt or have gone in for a re-finance at higher rates.  However, companies, which have a stretched balance sheet and also liquidity issues, are under significant pressure. True, that FCCBs are cheaper financing options in the hands of companies. However, the benefit of the cheaper cost should also be viewed in the context of uncertainty in the forex rates (if the exposure is un-hedged). Else the low cost debt benefit can be completely wiped off leaving the company on the verge of default in testing times.   

Yen extends drop, Euro up

The Japanese Yen went on to hit a six month low against the US Dollar on Wednesday as Yen selling continued.
This is a direct result of the Bank Of Japan's monetary easing actions last week. Analysts also believe that the Yen has come under additional pressure after Japan's current account surplus fell to a 15 year low last year.
The Euro rose against the Yen but struggled to make headway, as initial optimism over the Greek bailout deal quickly gives way to concerns about economic growth and implementation risks.

Citi may face hefty writedown

 Citigroup (C) is facing a potential multibillion-dollar writedown as it begins unwinding its minority investment in the Morgan Stanley Smith Barney brokerage. Accounting complications and a reduced valuation could leave Citi facing an after-tax hit of up to $1.8B, more than it earned in Q4.

Fitch cuts Greece

 Fitch downgraded Greece to C from CCC this morning, saying the Greek bond swap would be a restricted default.  "Greece or ratings agencies." European shares and the euro hardly blink in response to the downgrade, with the Stoxx 50 -0.8% and the euro flat and buying $1.3228 (7:10 ET).

Euro Soars After Greece Seals The Deal

  The Euro rose in the Asian session on Tuesday,  after Euro Zone finance ministers sealed a bailout  package for Greece.
  While the Greece deal has given the Euro a jolt,  most analysts still believe that the news will not  give the currency a big boost.
  The Yen hovers near multi-month lows against most  other major currencies after last weeks surprise  decision from the Bank of Japan prompted increased  Yen selling.

SC reverses Kerala HC Full Bench decision; Allows Sec 36(1)(vii) deduction to banks

Proviso to Sec 36(1)(vii) does not restrict deduction for bad debts to banks in respect of urban advances; Proviso applicable only to bad debts in respect of which provision claimed u/s 36(1)(viia); Provisions of Section 36(1)(vii) and 36(1)(viia) distinct and independent items of deduction  :  SC

In a significant ruling pronounced earlier today, a three judge bench of Supreme Court held that the banks are entitled to claim deduction for bad debts u/s 36(1)(vii), irrespective of limit specified in the proviso thereto, if bad debts written off relate to debts other than those for which provision is made u/s 36(1)(viia).

ThisSC ruling has the effect of  reversing Kerala HC full bench decision in South Indian Bank Ltd (2010) 233 CTR (Ker)(FB) 214, wherein it was held that the banks which are entitled to claim deduction of provision for bad debts u/s 36(1)(viia) are covered by the proviso to clause (vii), irrespective of the nature of advances with respect to which the bad debt written off is claimed as deduction.
 Catholic Syrian Bank Ltd [TS-91-SC-2012]

Greece is living out its worst nightmare

Saying something and actually experiencing are two very different things. The Greeks have been forced to adopt austerity measures. This sounds good in papers and has actually led global markets into a heady upswing. But for the ordinary Greeks, there is nothing to cheer. Heavy pay cuts, short supply of medicinal drugs, higher taxes, lower pensions, are just some things that they have to make do with. The worst part is that there is no respite in sight. The country is in one of the worst recessions ever. Its downturn has lasted twice as long as the average economic crisis. The huge mountain of debt that Greece had taken on, has now come back to haunt them. The country is literally living out its worst nightmare. But then this is what happens when you stretch yourself beyond your means. And it is common knowledge that Greece had stretched itself out too thin. Though the Eurozone has been bailing it out time and again, the point is till when can this continue? So should Greece be allowed to default and quit the Euro? The Eurozone does not wish to think of this possibility as of now. But eventually they will have to.


 

Euro Zone problems persist

While a Greek bailout remains a major market focus, attention is drawn to the possibility of a ratings cut for France and Britain.
The markets are still keeping an eye on a March 20 deadline for Greece to meet debt repayments of 14.5 billion Euros.
Greek Prime Minister, Luca Papademos, and his coalition need to secure bailout funds before then, while EU leaders want to see details on how the promised budget savings will be achieved.
Attention is now focused on Wednesday's meeting of Euro-zone finance ministers, who are meant to decide on the rescue package.
Beijing officials will also be meeting with their European counterparts in the next few days, as China considers investing in a bail-out fund to help nations crippled by debt.
China's foreign exchange reserves are the largest in the world. The Euro zone is collectively China's largest trading partner and the largest economy in the world and China also sees it is as important for the European Union to resolve its current issues.
Euro Advances But Many Hurdles Lie Ahead
The Euro advanced on what many analysts believe to be relief over the Greek parliament vote to approve new austerity measures. Greece is not in the clear just yet.
Euro Zone finance ministers will meet on Wednesday to listen to Greece explain how this year's total budget cuts will be achieved before it agrees to the bailout deal.
Meanwhile, the Bank of Japan unexpectedly announced further stimulus measures in order to bolster the country's economy on Tuesday which saw the Yen weaken.

Govt.Debt as a Percentage of GDP

One of the main reasons why any meaningful recovery has failed to take place in both the US and Europe is that debt of those countries has ballooned. Indeed, in Europe many of the countries are struggling to keep head above water and are compelled to resort to austerity measures to bring down debt at a time when growth has stagnated. That is why country debt has assumed importance like never before. So what about emerging nations? Today's chart of the days shows that India's government debt as a percentage of GDP is quite on the higher side. This is in contrast to China, where it is low and so it has more headroom to spend.

Capital gains tax not applicable when the cost of improvemen​t not ascertaina​ble

Transfer of right to use FSI and load additional TDR on a plot of land not chargeable to capital gains tax, as the cost of acquisition of the right to load TDR not ascertainable; Right to load TDR under Development Control Regulations 1991 as an ‘owner of receiving plot’ amounts to improvement to the capital asset;  Cost of such improvement to capital asset cannot be determined and it could not be acquired by paying a price;  Ratio of SC ruling in B.C Srinivasa Setty squarely applicable, even when the ‘cost of improvement’ not ascertainable;  Mumbai ITAT rulings in Maheshwar Prakash CHSL and Jethalal Mehta relied upon : Mumbai ITAT

ACIT v. Shri Ishverlal Manmohandas Kanakia [TS-74-ITAT-2012(Mum)]

Greece Optimism Running On High

The Euro hit a 2 month high fueled by optimism over Greece before slipping back over the last few hours. According to reports, Greek officials have agreed to all terms except one which will see talks continue later on today.
Most analysts believe that we will see the deal go through later on today, but at this stage, we've heard it all before. So we'll have to wait and see what happens.
If the deal does go through, it would likely offer only a short-term boost to the Euro given the ongoing uncertainties about Greece and the other Euro Zone economies.

Greek parties stopped just short of signing off on austerity measures for a 130 billion-euro ($172 billion) rescue package. Nevertheless, the Euro hit a new two-month high earlier on Thursday on belief that Greece is now closer to a bailout deal.

All points of a bailout package were agreed on bar pension cuts. The main issue there revolves around finding alternatives to make up for a 300-million Euro shortfall.
Officials have said that discussions with international lenders were still underway so that a deal could be concluded before a meeting of Euro zone finance ministers today.

The Institute of International Finance is to hold a meeting to discuss technical matters. The idea is that if an accord between Greece and the troika is reached, a debt swap could be implemented quickly.
European Central Bank policy makers also hold their monthly meeting today in Frankfurt. They face questions on their potential role in helping Greece reduce its debt as the threat of a disorderly default mounts.

HC : Reserve created on revaluatio​n of asset under amalgamati​on not to be added to book profits under MAT

Reserve created on transfer of work-in-progress at revalued amount under the scheme of amalgamation, not out of profits; Such reserve was a result of amalgamation entries passed as per accounting standard on amalgamations and the scheme approved by High Court and could not be said to be routed through P&L; Reserve not to be added to book profits for the purpose of MAT computation: Mumbai ITAT

ITO Vs. United Estate Pvt Ltd [TS-68-ITAT-2012(Mum)]

Is US is in Decline ?

In 1969 more than one out of every three dollars of income in the entire globe was earning in the US. That's what the IMF's World Economic Outlook tells us.

By 2000, that number had fallen...but not by much. The US still took home 31% of global income. But in the last 10 years, the US share has fallen hard - losing more than 7%. Now, only 23% of the world's income is generated by the US.

Ten years ago, China's economy measured about 1/8th the size of the US. Now, it is 41%. Another decade and it will the biggest in the world. It is already bigger by several measures. And even if its growth declines to 7% a year, it will still surpass the US in a dozen years.

Hey, don't take it personally. The entire developed world is in decline - with America leading them all down.

By 2050, according to a new study from HSBC, today's emerging economies / as a whole - will be larger than Europe, America and Japan put together.

The New York Times reports:

The American economy's reported 2.8 percent growth in the fourth quarter, at an annual rate, was seen as mildly encouraging. But it meant that over the previous 10 years, the economy had grown at a compound annual rate of just 1.7 percent. Until the current cycle, there had been no similar prolonged period of slow growth since the Depression.

The International Monetary Fund's latest forecasts indicate that there is not likely to be a pickup in growth anytime soon, either in the United States or other large industrialized countries.

...if the fund's forecasts of 1.8 percent real growth in 2012 and 2.2 percent in 2013 prove to be accurate, the 10-year American rate at the end of 2013 will have fallen to 1.5 percent.... But it will still be a little above the 0.9 percent compound growth rate in the decade from 1929, the year the Depression began, to 1939.

For Britain, which endured a horrible decade in the 1970s that led to talk of the "British disease," the previous postwar low, not shown in the charts, was in the 10 years ending in the second quarter of 1983, an annual rate of 0.95 percent. The figure for the 10 years through 2011 is 1.4 percent, but the I.M.F. predictions indicate the 2013 figure will fall to just 0.94 percent. The fund expects the British economy to grow by just 0.6 percent this year and by 2 percent in 2013.

The situation is even worse in Italy, where the fund expects the economy to contract by 2.2 percent this year and 0.6 percent the following year. If that happens, Italy's economy will be smaller at the end of 2013 than it was 10 years earlier. The French economy is forecast to have grown at a 1 percent annual rate over the same 10-year period.

As the developed economies stagnate, the 'emerging' economies grow. Nineteen of the world's top economies in 2050 will be those we regard as "emerging" today. China and India will hold the number 1 and number 3 spots, with the US sandwiched between them.

S. 271(1)(c): Despite conceding “bad debts”, assessee can raise new plea of “trading loss”

CIT vs. Sumangal Overseas Ltd (Delhi High Court)

The assessee gave advances to its suppliers of which Rs. 2.05 crores was written off as “bad debts”. The AO disallowed the claim on the ground that as the advances had never been treated as income, the conditions of s. 36(1)(vii) & 36(2) were not satisfied. The assessee accepted the disallowance. Penalty u/s 271(1)(c) was levied by relying on Escort Finance 328 ITR 44 (Del) on the ground that in the case of a corporate assessee whose accounts were duly audited by qualified Chartered Accounts, the claim of bona fide mistake is untenable. However, the Tribunal deleted the penalty on the ground that the write off, though not admissible as “bad debts” was allowable as a “trading loss”. On appeal by the department, HELD dismissing the appeal:

In penalty proceedings, it has to be seen whether the claim was bona fide or it was bogus and result of falsehood. On facts, there was no dispute on the genuineness of the advances. A trading loss has a wider connotation than a bad debt. While a bad debt may also be a trading loss, a trading loss need not necessarily be a bad debt. A bad debt may not fall within the purview of s. 36(1)(vii) but may well be regarded as being eligible for deduction as being a “trading loss”. Accordingly, the claim was neither mala fide nor false but was bona fide and made after disclosure of facts CIT vs. Reliance Petroproducts 322 ITR 158 (SC) followed).

S. 2(22)(e) does not apply to “non-gratuitous” advances to substantial shareholder

Pradip Kumar Malhotra vs. CIT (Calcutta High Court)

The assessee, a substantial shareholder in a closely held company, let out his flat to the company and also permitted it to place it on mortgage. In consideration, the company passed a resolution authorizing the assessee to obtain from the company an interest-free deposit up to Rs.50 lakhs. He also received an amount by way of “security deposit”. The AO assessed the said “advances/ deposits” as “deemed dividend” u/s 2(22)(e). The CIT (A) deleted the addition though the Tribunal upheld it. On appeal by the assessee, HELD reversing the Tribunal:

The phrase “by way of advance or loan” s. 2(22)(e) must be construed to mean those advances or loans which a shareholder enjoys simply on account of being a person who is the beneficial owner of shares. If such loan or advance is given to such share holder as a consequence of any further consideration received from the shareholder, then such advance or loan cannot be said to be “deemed dividend” u/s 2(22)(e). Thus, while gratuitous loan or advance given by a company to a substantial shareholder comes within the purview of s. 2(22)(e), a case where the loan or advance is given in return to an advantage conferred upon the company by the share holder does not. On facts, as the advance was in lieu of the company being permitted to mortgage the assessee’s falt, it was not “gratuitous” and so not assessable as “deemed dividend” (Creative Dyeing 318 ITR 476 (Del) & Nagindas Kapadia 177 ITR 393 (Bom) followed).

S. 132: Cash seized in search has to be adjusted against “Advance Tax”

 Ram S. Sarda vs. DCIT (ITAT Rajkot)

Pursuant to a search u/s 132, cash was seized from the assessee and third parties and assessed as the assessee’s income. Though the assessee requested that the said seized cash be treated as payment of “advance tax”, the AO ignored the same and levied interest u/s 234A, 234B & 234C on the basis that advance tax had not been paid. On appeal, the CIT (A) relied on Central Provinces Manganese 160 ITR 961 (SC) and held that the ground was not maintainable. It was also held that cash seized from third parties could not be treated as the assessee’s payment of advance tax. On appeal by the assessee, HELD allowing the appeal:

(i) S. 246 permits an appeal to be filed when the assessee “denies his liability to be assessed”. The levy of interest u/s 234A to 234C is a part of the process of assessment. The expression “denies his liability to be assessed” does not mean a total denial of liability. Even a partial denial of the assessment i.e. of the liability to pay interest is covered and the appeal is maintainable (C. P Manganese 160 ITR 961 (SC) explained, Kanpur Coal Syndicate 53 ITR 225 (SC) & JK Synthetics 119 CTR 222 (SC) followed);

(ii) On merits, s. 132B (1) provides that the assets seized u/s 132 may be adjusted against the amount of any “existing liability” and the liability determined on completion of the assessment. The expression “existing liability” cannot be ascribed a restricted meaning. The liability to pay advance tax is an “existing liability” and so the cash seized ought to have been adjusted against that liability. The cash seized from third parties, having been assessed in the assessee’s hands, retains the same character as cash seized from the assessee (Sudhakar Shetty 10 DTR (Mum) 173 followed).

Macroeconomic forecasts for 2012

Here I review the forecasts of two authorities on global economic affairs, IHS and the IMF. This is summary for the IHS (2011):

“If Europe only suffers through a mild recession and China does not experience a hard landing, then world real GDP growth will slow from 4.2% in 2010 and 3.0% in 2011 to around 2.7% in 2012. On the other hand, if the recession in Europe is much deeper and/or the slowdown in China more pronounced, then the global economy will be headed for much weaker growth and possibly another recession.”
They are fairly optimistic about the USA, predicting growth of 2%, as well as projecting growth of 7.5-8% in China
.
The IMF (2011) predicted global growth of about 4% in 2012, down from “over 5% in 2010”. They were less optimistic about the USA, warning that a political impasse over fiscal consolidation, a weak housing market, a rapid increase in household saving rates or deteriorating financial conditions could. The optimism of the IHS report is due to the fact that some of these factors have started to look up between the months of publication between the two forecasts (September for the IMF, December for IHS).

Despite the relative overall optimism, caution is due. Much depends on the response of the USA and China to a likely European recession. Much of the demand contributing to the apparent recovery of the past few years has been created by the public sector. We have yet to see the precise impacts of fiscal tightening, and the only way we can continue along the current trajectory is if the economic activity stimulated by the public sector successfully transfers to the private sector. As yet it remains unclear whether this will happen.

Synopsis of the week

Indian Equity Market continues to be the best performing market in 2012 with Nifty clocking its 5th consecutive weekly gain, led by YTD FII inflows in excess of USD3bn. While this rally is not India specific, India benefitted the most from rising flows into Emerging markets, coming out one of the worst months ever in December. The week also saw Supreme Court deliver a landmark judgment cancelling ~122 telecom licenses issued by government in 2008. This would likely reduce competitive intensity and the sector would finally be served up the much awaited consolidation. Banking Secretary clarified that the Banking sector exposure to the affected parties is INR 100 Bn.

NHAI Bonds gear up bumper listing

Recently, National Highways Authority of India (NHAI) came out with its Rs 100 bn bond issue. With the listing date just around the corner, there is a considerable euphoria surrounding it. So much so that the grey market premium for these bonds has increased from Rs 5 to Rs 22 in just a month and quite understandably so. Being a tax free instrument, 8% coupon offered is effectively translating into a yield of 11-12% for investors in the highest tax bracket. As a result, High Net-worth Individuals (HNI) and institutional investors are actively trying to lay their hands on this issue through off-market deals.
Further, there are strong indications that the interest rate cycle has peaked out. This has further increased the attractiveness of these bonds (interest rates and bond prices tend to move in opposite direction). Sovereignty of the bonds (eliminates credit risk) is an additional feature. Thus, it appears that the NHAI bonds too are on a way for a bumper listing like the State Bank of India (SBI) bonds. In fact, the current economic scenario (flight to safety) has meant that listing gains are not just a feature of equity markets.

The recent ruling of the Supreme Court to cancel 2G licenses issued during Mr A Raja's time (of the infamous 2G scam) has been applauded by many. It has been seen as a victory of governance over greed. But it has also been criticised severely by another section of the society. This section states that the decision would hurt investor sentiment as there are a lot of foreign investors involved in this and the amounts invested by them are huge. Undoubtedly, the amount at stake was large as today's chart of the day shows. But the apex court's decision is not to try and hurt investors. It is to punish those who sought to obtain the licenses through any mean possible, even if it meant the wrong way. And it is not that every foreign company that holds a telecom license has been punished. After all, the judgeme nt has not affected the likes of Vodafone and Aircel (both companies have foreign party interests). The judgment is against those who did not even qualify for these licenses but went out of their way to make sure that they got a pie of the hitherto lucrative telecom sector.

AAR: Cost contributi​on received for business support services by UK group company taxable as FTS

Various business support and advisory services rendered to Shell India by UK group company, held to be ‘technical’ and ‘consultancy’ services; Such services ‘made available’ to Shell India since UK group company worked closely with Shell India’s employees; Shell India was also able to use know-how/intellectual property generated from general business support services independent of the service provider; Income of UK company taxable in India under Article 13 of India-UK DTAA as 'Fees for taxable services'; Reliance on India-US DTAA protocol rejected for India-UK DTAA interpretation; AAR ruling in Perfetti Van Melle Holding B.V . followed: AAR

Recently, AAR in the case of Shell Technology India P. Ltd [TS-760-AAR-2011] held that payment to Dutch group company for Business Support Services was not ‘Fees for Technical Services’ under the India-Netherlands tax treaty. AAR based on the facts had observed that financial business support services provided by Group company did not make available any technical knowledge, skill, knowhow, etc.