Is this dispute worth going in appeal?

My family owns a hotel in Hubli. An agreement was entered into about twenty years ago with a licensee whereby the restaurant in the hotel was given to him for running the same for 25 years.

A few years ago there was a dispute with the licensee and he was paid a lump sum amount to terminate his licence. The tax department is treating this as capital expenditure, whereas my company has debited the amount as revenue expenditure and claimed tax deduction for the expense. Is this dispute worth going in appeal?

P Hegde, Doha

The compensation paid by your company to settle the dispute with the licensee cannot be treated as capital expenditure. The amount paid to terminate the licence is a business expense, which is incurred to enable your company to repossess the premises so that it can conduct the restaurant business itself. It cannot be said that there is an enduring advantage.

Courts have held that payments made for resolving disputes with licensees and removing hindrances are expenditure on revenue account. Such expenditure is deductible under section 37 of the Income-tax Act, 1961, as it is incurred on grounds of commercial expediency.

I have been appointed as a non-executive director in a company in India. I am told that I will have to collect service tax from the company, which pays the director’s fees to me and deposit it with the government. I am concerned about this development as I do not have an administrative set up in India to collect the tax and deposit it with the government.

R.K. Khanna, Ruwi

Since the services rendered by non-executive directors have not been included in the negative list of services, service tax would have to be paid with effect from July 1. However, it has now been clarified by the Finance Ministry that the service tax will be payable by the company under the reverse charge basis.

Thus, the non-executive director would not be liable to collect the service tax and pay it to the government, but the company paying the director’s fees would be directly liable to pay the service tax to the government. Hence, the burden of compliance would be entirely on the company and not on the non-executive director.

I am informed that the Indian government has entered into an agreement with the government of Jersey for exchange of information. If so, in what circumstances would the information be provided to the Indian Government?

C. D’Souza, Doha

The information exchange agreement was signed in London on November 3, 2011. Under Article 5.6 of the Agreement, information can be provided by the government of Jersey to the government of India provided the Indian government gives adequate grounds for believing that the information is in the possession of the government of Jersey.

The Indian government has to provide the 
identity of the person who is under investigation and give details of the nature of the information requested.

The agreement does not create an obligation to provide information with respect to publicly traded companies. It is important to note that the information requested should be relevant to the administration and enforcement of taxation laws of the two countries.

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