Taxman guns for overseas assets

With the intention of tracking overseas assets of Indian tax residents, the Finance Act 2012 mandated filing return and disclosure of assets (including financial interest in an entity or signing authority in any account) located outside India. This is applicable from Financial Year 2011-12 for taxpayers who qualify as ordinary residents in India, irrespective of whether they have taxable income or not.

The new income tax return forms contain a separate schedule for disclosing overseas assets. Further, additional details such as peak balance in the bank account during the year, investment value of asset at cost should be declared in rupees.

To track such cases better, the return of income should mandatorily be filed electronically (with or without a digital signature). Also, Revenue can reopen cases for the past 16 years if it has reason to believe that income relating to such assets has escaped assessment.

While this is a step towards curbing money laundering, it entails additional disclosures/ compliances for foreign nationals coming to India for work and also for their family members who become ordinary residents by virtue of their stay pattern but otherwise may not have taxable income.

There are also several practical issues faced by assessees. It is not clear what constitutes an asset for the above reporting. Further, while most overseas assets would have been bought in foreign currency, the reporting is required in Indian currency, with no guidelines prescribed for such currency conversion. Also, there is no clarity on whether assets held during the year or on the last day of the FY are to be disclosed. With the amendment effective from the current assessment year and the return filing deadline round the corner, the above aspects are subject to different interpretations.

Tax treatment of goodwill

An amalgamation when accounted under the purchase method of Accounting Standard 14 may give rise to goodwill/ reserve (represented by excess/ deficit of consideration over value of net assets acquired). The tax treatment of such goodwill has been the subject of some litigation.

Recently, the Chennai ITAT in the case of Spencer and Co confirmed that ‘negative goodwill’ (reserve) arising on amalgamation is not taxable as no actual benefit arises to the assessee even though the capital reserve arising pursuant to the scheme was treated as general reserve.

Separately, as regards allowance of depreciation, while there appears to be a reasonable consensus on acquired goodwill, there seems to be conflicting views on goodwill on amalgamation. The Mumbai ITAT in the case of Toyo Engineering held that positive goodwill arising on account of amalgamation is merely a book entry and not eligible for depreciation for tax purposes. However, the decision seems to further suggest that upon amalgamation if the consideration paid by the assessee exceeds the fair value of net assets, there is a plausible case that a certain amount was incurred towards goodwill. This observation appears to have overlooked the provision of the Income tax Act that depreciable value of assets in the hands of transferor should remain the same for the transferee after amalgamation. Therefore, the goodwill carrying ‘nil’ tax cost for the transferor will remain so for the transferee, and it may not be practical to claim any depreciation on it.

It may be noted that the Hyderabad ITAT in the case of AP Paper Mills Ltd held the goodwill on amalgamation to be a depreciable asset. However, the decision was silent on the issue of the tax cost discussed above and hence may not be an authoritative view on the subject.

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