SANJEEV BEDI SAYS SOICAI_MEERUT_CA

TDS on Hire-purchase/Interest Charges

2009-03-02T23:07:00.000-08:00

Hi Balu, Jaysukh, Madhu and Rajendra,

Theoretically, you guys are correct. But I am looking at thesubstance of the transaction rather than its form. I understand mostof these car finance companies enter into some sort of an agreementthat on paper at least looks like what may be called a hire-purchaseagreement. But if you look beyond the fine print of the agreement,you'd find these are simple finance transactions with a lender and aborrower. Assessees often try to sidestep their TDS responsibilitiesby advancing the argument that such transactions are Hire-purchasein nature. Since the ownership hasn't passed on to them, whatthey're paying is not interest but hire charges.But in almost all such cases, the same assessees also don't want toforego the depreciation on these assets. They incorporate the costof the car in the books and start claiming depreciation on it rightfrom year one. Now you have to be the owner of the asset in order toclaim depreciation on it. If you've put forward a claim ofdepreciation, you can't in the same breath contend that you'remerely a hire-purchaser, when it comes to making the TDS.So I think if an assessee purported to be a hire-purchaser, isn'tclaiming depreciation on the car, then it might be okay not todeduct TDS on the hire charges paid to Maruti Countrywide, et al.Balu, the CBDT circular of 1981 you've quoted from must have had itsrelevance in its heyday, but not any more. There's a huge emphasison Substance over Form in interpreting business transactions thesedays. And yes we have to refer to AS 19 as well to resolve thisissue, in view of the fact that AS 19 includes hire-purchaseagreements within the meaning of leases. There're two kinds ofleases: A Finance lease and an Operating lease. Hire-purchasecontracts are treated as finance leases. The soul of a finance leaseis the passing of all risks and rewards of ownership of the asset tothe lessee. Since this practically makes the lessee the owner of theasset, AS 19 requires us to recognize the leased asset in the booksof the lessee. Not doing so wouldn't reflect a true and fair view ofthe state of affairs. An asset actively deployed in the services ofthe business ought to be reflected in the books at some value.The Supreme court in the case of Asea Brown Boveri Ltd. v.Industrial Finance Corpn. of India [2005] 56 SCL 21 hascategorically said that a finance lease is merely a loan indisguise. A finance lease is a transaction current in the commercialworld, its primary purpose being the financing of the asset by thepurchaser, the court said.Another thing to be noted is lessor in finance lease cases istypically a financial institution, like we have the MarutiContrywide in the instant case. By its very nature, a financialinstitution is in the business of dispensing money. It merelystepped in as an intermediary between the assessee and the cardealer. Maruti Countrywide and other such finance companies havebeen formed for engaging in the business of financing and not thebusiness of giving assets on hire. Section 194-I, in my opinion,gets attracted where the person we hire the equipment from is in thebusiness of giving those equipments on hire. A car finance companyisn't in the business of giving cars on hire. The car has alreadybeen bought and sold for. The dealer is out of the picture. MarutiCountrywide made the payment on our behalf on the promise that weshall repay it over a period of time. We can't say we hired the carfrom Maruti Countrywide.So methinks, TDS u/s 194A would be applicable on the interest(doesn't matter what you call that amount—Substance over Form!)comprised in the EMIs paid to the car finance company.And Mr Soodan, yes that's a practical problem—how to "deduct" TDSwhen you've already parted with the pre-filled PDCs? I guess wemight have to somehow recover the tax amount from them separatelyagainst the issue of Form 16-A. The TDS issues need to be clearlysorted out before we go in for financing through these privatecompanies.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, "balunand" wrote:>>> The instant case is one of Hire Purchase and since the vehiclecan be> repossessed anytime during the period of contract for default, the> additional amount paid is only hire charges and not interest. This> view has been given by the CBDT itself in the context of InterestTax> Act in Instruction No. 1425 in F. No. 275/9/80-IT(B) dated> 16-11-1.981, which is reproduced below.>> 'In a hire-purchase contract the owner delivers goods to another> person upon terms on which the hirer is to hire them on a fixed> periodical rental. The hirer has also the option of purchasing the> goods by paying the total amount of agreed hire at any time or of> returning the same before the total amount is paid. It may bepointed> out that part of the amount of the hire-purchase price is towardsthe> hire and part towards the payment of price. The agreed amountpayable> by the hirer in periodical instalments cannot, therefore, be> characterised as interest payable in any manner with the meaning of> section 2(28A) of the Income-tax Act, as it is not in respect ofany> money borrowed or debt incurred. In this view of the matter, it is> clarified that the provisions of section 194A of the Income-tax Act> are not attracted in these transactions.'>> Now the question is would sec 194I be attracted?>> Balu> > From: ICAI_CIRC_MEERUT_CA@yahoogroups.com> > [mailto:ICAI_CIRC_MEERUT_CA@yahoogroups.com] On Behalf OfSanjeev Bedi> > Sent: 22 December 2008 22:08> > To: ICAI_CIRC_MEERUT_CA@yahoogroups.com> > Subject: {amresh's-CA's} Re: TDS on Interest on car loan fromMaruti> > Countrywide> >> >> >> > Hi Mr Mohan, Madhu and Gowdhaman,> >> > In my opinion, TDS would be deductible u/s 194A. This is because> > Maruti Countrywide is neither a banking company registered underthe> > BRA 1949 nor a body that's been notified by the government u/s194A> > (3)(iii)(f). And companies like Maruti Countrywide and Kotak> > Mahindra don't seem to be covered under any of the otherexemptions> > listed in sub-section 3 of Section 194A either.> >> > The onus to prove that TDS isn't deductible on interest toMaruti> > Countrywide or the like is on those who claim so. If we can'tfind a> > notification or circular supporting such a claim, Section 194A> > stands applicable to such interest payments.> >> > Thanks,> >> > CA Sanjeev Bedi> >> > --- In ICAI_CIRC_MEERUT_CA@yahoogroups.com> > , madhu tapuriah> > wrote:> > >> > > but why? under which provisions ????> > >> > > --- On Mon, 22/12/08, gowdham wrote:> > > From: gowdham > > > Subject: Re: {amresh's-CA's} TDS ON INTEREST ON LOAN> > > To: ICAI_CIRC_MEERUT_CA@yahoogroups.com> > > > > Date: Monday, 22 December, 2008, 10:56 AM> > >> > >> > >> > >> > >> > >> > >> > >> > >> > >> > >> > > Dear Mr.Mohan,> > > Â> > > You need not deduct TDS.> > > Â> > > Thanks &regards> > >> > >> > > R.S.GOWDHAMAN> > >> > > --- On Fri, 19/12/08, mohangee wrote:> > >> > > From: mohangee > > > Subject: {amresh's-CA' s} TDS ON INTEREST ON LOAN> > > To: ICAI_CIRC_MEERUT_ CA@yahoogroups. com> > > Date: Friday, 19 December, 2008, 12:33 PM> > >> > >> > >> > >> > >> > > Sir,> > > My client is a partnership firm took loan from maruthi country> > wide for a vehicle.> > > WhetherÂ tds is to be deducted for the interest paidÂ on loanto> > maruthi countrywide?> > > CA MohanÂ

Exemption u/s 54F--Possession Letter Date or Date of Payment?

2009-03-02T23:06:00.001-08:00

Hi Nareshji,

Suppose it'd been the other way round: your client had made thepayments within 2 years AFTER the transfer of the asset but he'dbeen issued the Letter of Possession after the expiry of 2 yearsfrom the date of transfer of the original asset. Then, in thatevent, would you or would you not have argued that since thepayments were made well within the allotted time of 2 years for thepurchase of the house, the client was eligible for exemption u/s54F, even if he took physical possession of the house after 2 yearshad lapsed from the date of transfer?Normally we come across cases where an assessee has made the payment(s) towards purchase of house before the deadline of 2 years and haseven got the allotment letter issued in his favour, but he hadn'tyet moved into the house (or hadn't yet acquired some sort of rightof passage on it in the sense that nobody can trespass the propertywithout his permission) by the time the period stipulated u/s 54Fcame to an end. But in your case, since we want to drag the date ofpurchase down to the point where it is within one years BEFORE thedate of transfer of the asset, we have to do a volte-face and arguethat the payments from 2002 till May 2005 didn't create anyinalienable right to property in our favour. I don't know what thefine print in the documents says, but prima facie, it appears theonus to prove that an inalienable right over the residential flathad been created in your client gradually over the period of 3 yearswhile the assessee was making the payments lies on the AO. Paymentsmade gradually over a period of time as such certainly don't make usthe owner of a property, till the time we've got some right ofpassage (which doesn't necessarily mean having some documentaryevidence, incidentally) over that property. The finalallotment/handing over of possession would depend upon fulfillmentof other conditions as well. The AO wants to set the clock behind byearlier than 1 year to deny you the exemption. But I don't thinkhe's being fair, if indeed you have a letter of possession thatcategorically and unambiguously states that the risks and rewards ofownership were shifted to your client on the date of issue of thepossession letter, and not before.If you had sold this property say in 2007 (assume the last paymenttowards the property was made in 2004—36 months before the sale),would the AO have readily agreed to treat the CG as LTCG? No! Hewould then have taken the stand that the date of issue of possessionletter was the date of purchase! STCG fetches more revenue! It's ahypothetical scenario, but there's nothing that prevents you fromadvancing this as an argument.We do have case laws where the courts have ruled that "purchase" inSection 54F should be given a commonsensical meaning—if we've made aseries of payments in pursuance of a contract which is binding onthe authority in the sense that we get an irrevocable right toacquire that piece of property by way of the issue of a letter ofallotment in our favour, we'd be said to have "bought" that propertyon the date the letter of allotment/possession bears.In the case of CIT v. Smt. Beena K. Jain [1994] 75 Taxman 145(Bom.), the registration of the sale deed had taken place a bitlater than the actual handing over of the flat and the AO had deniedthe exemption u/s 54F as mere possession, he argued, didn't amountto "purchase". The court ruled that the relevant date for thepurposes of section 54F is when the petitioner paid the fullconsideration amount on the flat becoming ready for occupation ANDobtained possession of the flat.In your case, it seems the transaction of purchase of the flat gotCRYSTALLIZED upon the issue of the possession letter. Till the timeyour client hadn't had that letter, his right to buy that flat wasrevocable. Therefore, he "purchased" the flat on the date he got itspossession.All the best,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, "CA.Naresh" wrote:>> Dear all>> Please help on the following isue which is stuck up in a scrutinycase:>> Land sold in May 2005 for Rs 3000000/->> Residential Flat was booked in June 2002 and payments were madefrom 2002 till May 2005. Possession letter was dt 25th June 2005.>> The assessee has claimed exemption u/s 54F .>> The assessing office has disallowed the exemption since thepayments were made before 1 year from the transfer date. I amcontesting the allowability on the basis of the Possesion letterwhich is within 1 year before the transfer date.>> A.O has rejected the arguement.>> Any case law or favourable opinion>

TDS on Interest on car loan from Maruti Countrywide

2009-03-02T23:04:00.000-08:00

Hi Mr Mohan, Madhu and Gowdhaman,

In my opinion, TDS would be deductible u/s 194A. This is becauseMaruti Countrywide is neither a banking company registered under theBRA 1949 nor a body that's been notified by the government u/s 194A(3)(iii)(f). And companies like Maruti Countrywide and KotakMahindra don't seem to be covered under any of the other exemptionslisted in sub-section 3 of Section 194A either.The onus to prove that TDS isn't deductible on interest to MarutiCountrywide or the like is on those who claim so. If we can't find anotification or circular supporting such a claim, Section 194Astands applicable to such interest payments.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, madhu tapuriah wrote:>> but why? under which provisions ????>> --- On Mon, 22/12/08, gowdham wrote:> From: gowdham > Subject: Re: {amresh's-CA's} TDS ON INTEREST ON LOAN> To: ICAI_CIRC_MEERUT_CA@yahoogroups.com> Date: Monday, 22 December, 2008, 10:56 AM>>>>>>>>>>>> Dear Mr.Mohan,> Â > You need not deduct TDS.> Â > Thanks &regards>>> R.S.GOWDHAMAN>> --- On Fri, 19/12/08, mohangee wrote:>> From: mohangee > Subject: {amresh's-CA' s} TDS ON INTEREST ON LOAN> To: ICAI_CIRC_MEERUT_ CA@yahoogroups. com> Date: Friday, 19 December, 2008, 12:33 PM>>>>>> Sir,> My client is a partnership firm took loan from maruthi countrywide for a vehicle.> WhetherÂ tds is to be deducted for the interest paidÂ on loan tomaruthi countrywide?> CA MohanÂ

Section 50C--FMV vs Stamp valuation figure

2009-03-02T23:02:00.001-08:00

Hi Moiz,

What you should do now is claim, in terms of the right given to youu/s 50C(2), before the AO that the value adopted by the stampvaluation authority exceeds the fair market value of the property ason the date of transfer. The valuation on which the state governmentauthorities demand stamp duty can't be treated as sacrosanct,something that can't be called into question under anycircumstances. Section 50C merely puts the onus of proving that theactual FMV of the property is less than that considered by the stampduty authorities on the assessee. Unless the assessee is able toprove it, the AO would go ahead and treat the stamp valuation figureas the real sale consideration.Upon the plea by the assessee, the AO would refer the matter ofvaluation to the Departmental Valuation Officer. And if the DVO endsup certifying the value to be more than the figure considered by thestamp authorities to levy the stamp duty, the lower value i.e. theone taken for the purposes of stamp duty, will be considered as thesale consideration u/s 50C. In other words, the assessee has gotnothing to lose when he insists upon a fresh valuation by the DVO.The stamp duty rates aren't always reflective of the real marketvalue of a property. The circle rates on which the stamp authoritiesbase their valuation are fixed on an ad hoc basis, many times as awhole even for a huge locality. They don't take into account thecharacteristics of a specific piece of property. For example, aproperty that is set back a little from the main street won't fetchas much price as the one that is situated up front. These twoproperties may be set only a few feet apart from each other, buttheir FMVs would differ substantially. Despite that, the stateauthorities will recover the stamp duty at the same rates in theevent of sale of both of these properties. In such a situation, theowner of the first-mentioned property would be hard put by Section50C—he would be required to pay capital gains tax on the amount henever realized!The law isn't so harsh fortunately. We do have sub-section 2 ofSection 50C. But the onus, like I said before, that the FMV isn'tnearly as much as the stamp valuation figure, would fall upon you—the assessee. The fact that there is a provision for referring thevaluation to the DVO itself indicates that the department realizesthe stamp valuation authority shouldn't be the final arbiter when itcomes to determining the capital gains tax recoverable from anassessee.Below I quote a Delhi Tribunal judgement where the Tribunal rejectedthe valuation report of the DVO because he had relied too much onthe stamp valuation itself in framing his own report. This judgementmight help you cope with the situation better.[On a perusal of valuation report, however, we find that even thevaluation by the DVO has placed too much of emphasis on theassessment or valuation by the stamp valuation authority. This isneither desirable nor permissible. The reason is this. The valuationby the stamp valuation authority is based on the circle rates. Thesecircle rates adopt uniform rate of land for an entire locality,which inherently disregards peculiar features of a particularproperty. Even in a particular area, on account of location factorsand possibilities of commercial use, there can be wide variations inthe prices of land. However, circle rates disregard all thesefactors and adopt a uniform rate for all properties in thatparticular area. If the circle rate fixed by the stamp valuationauthorities was to be adopted in all situations, there was no needof reference to the DVO under section 50C(2). The sweepinggeneralizations inherent in the circle rates cannot hold good in allsituations. It is, therefore, not uncommon that while fixing thecircle rates, authorities do err on the side of excessive caution byadopting higher rates of the land in a particular area as the circlerate. In such circumstances, the DVO's blind reliance on circlerates is unjustified. The DVO has simply adopted the average circlerate of residential and commercial area, on the ground that interiorarea of the locality, where the assessee's property is situated, ismixed developed area, i.e., shops and offices on the ground floorand residence on the upper floors. When DVO's valuation required tocompare the same with the valuation by the stamp valuationauthority, it is futile to base such a report on the circle reportitself. Such an approach will render exercise under section 50C(2) ameaningless ritual and an empty formality. In our considered view,in such a case, the DVO's report should be based on considerationstated in the registration documents for comparable transactions, asalso factors such as inputs from other sources about the marketrates. For the reasons set out above, and with these observations,we remit the matter to the file of the Assessing Officer. The DVOwill value the property de novo, in the light of our aboveobservations, and in case the valuation so arrived at by the DVO isless than Rs. X (the stamp duty valuation), the Assessing Officershall adopt the fresh valuation so done by the DVO for the purposeof computing capital gains under section 48 of the Act. We directso."]--Ravi Kant v. ITO [2007] 110 TTJ (Delhi) 297Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_CA@yahoogroups.com, "moizjaorawala" wrote:>> Dear Friends> In one of my client's case, ITO has not accepted valuation reportof> govt. approved valuer, certifying value of the sold property atless> than the sale consideration received and instead has substitutedthe> amount on which stamp duty is paid.> I would like to know from members:>> 1.what are my chances of succeeding in appeal?> 2.are there any case laws decided either by CIT(A) or Hon.Tribunal?> 3.Can there be penalty levied u/s 271(1)(c).>> If members can guide me in this matter and provide usefulmaterials,> information etc., I would be thankful .> moiz>

More on write-back of Loans and Section 41(1)

2009-03-02T23:01:00.001-08:00

Dear Pramod Ji,

That's one way to look at it. I had thought along these lines too,but couldn't bring myself to conclude that a working capital loanwritten back won't be hit by Section 41. I understand we made thefull payment to the supplier of goods. But did my liability onaccount of purchase of those goods cease? No, it did not. When Imade out a cheque to the supplier of goods (or shares, which is thestock-in-trade in your case), what I effectively did was replace onetrading liability with another trading liability. So after thesupplier's account got squared up, the entry in the books thatremained was Purchases debit; Bank credit. The liability to thesupplier of goods was my primary liability and the liability to thebank is my secondary liability. Till the time I do not pay to thebank there has been no outflow of any resources controlled by me.But I am able to charge Purchases to my revenue account and claimthose as expenditure—the accrual method of accounting permits me todo that.What you're saying is since the primary liability to the supplier ofgoods is discharged, there's no question now of its cessation orremission. So Section 41 can't be brought into action in such acase. But if we really go by the spirit of Section 41—allowingexpenditure only to the extent there's been an outflow of cash orother resources and not allowing expenditure to the extent it wasa "freebie"—it's difficult to draw the conclusion that once theprimary liability to the supplier of goods is discharged, Section 41ceases to be applicable.Section 41(1) speaks of "obtaining any benefit, whether in cash orin any other manner whatsoever" in respect of a loss or expenditurealready claimed as a deduction in an earlier year. Isn't the waiverof a trade loan tantamount to "obtaining any benefit"? The bankmerely acted as our agent when it honored the cheque we drew upon it—it stepped in to clear my dues to the supplier on the understandingthat I shall have that debit adjusted through credit by way ofdeposit of sale proceeds with the bank. When I didn't do that andgot myself absolved of my liability to pay to the bank, how can Isay that I haven't "obtained any benefit" in respect of theexpenditure that the bank paid on my behalf?When you say "never a claim for loan is allowed", you're looking atonly the credit aspect of the transaction. How do we claima "deduction" for a loan anyway? Obviously it's the debit aspect ofthe transaction that we have to look into. The bank certainly is asource for funds, but it's difficult to ignore the clear nexus thissource of finance has with the payments made on account of purchasesMay be you're right; may be I am wrong. But as I understand Section41(1), the above is what I feel. Of course if I was practicallyhandling this case, I would argue the case before the AO exactly inthe manner that you do here! And your argument that we can'tinterpret the words "trading liability" u/s 41(1) in so wildlyliberal a manner as to go after the ultimate source of funds itselfdoes have a lot of weight. Admittedly, this issue doesn't concern mein the same manner it concerns you.Regarding the unilateral write back of the liability, I don't thinkany case law would bail us out any longer after the insertion ofExplanation 1 to Section 41(1). A person writes a liability backafter he's decided not to pay it. Now when it comes to paying tax onit, he can't contend that although the debt he owed has become time-barred, the creditor can still recover the amount from him and theliability therefore hasn't ceased. Unilateral write-back wouldinvoke Section 41(1), the debt being time-barred notwithstanding.I had brought up Section 56 just to make the discussion academicallyinteresting. It won't apply to cases where the sums of money havebeen received before 01.09.2004.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, PRAMOD GOENKA wrote:>>> Dear Sanjeev bhai>> Thanks a lot for the detailed reply. I wish to clarify and discussa few points.>> 1. It is true that the broker used the loans to purchase shares onhis own account. However, never a claim for a loan is allowed, whatis allowed is a claim for purchases. The source of funds is, to me,totally irrelevant. Had the purchase price not been paid finally,there would have been a case under section 41. But that is not thecase here. The purchase price has been paid to the opposite partiesand it is not being wirtten back. What is being written back is theloan that was taken to purchase the shares. Interest has been paidand claimed on these loans. Probably in the case cited by you, sincethe purchase was confined to fixed assets, the assessee had astronger case and it did not argue and distinguish between thepayment of purchase price and repayment of loan, since in any event,no deduction was taken even for the purchases made. In my case, Ifeel, we can plead that the deduction has never been claimed for theloan, what has been claimed is the purchase price, which is notbeing remitted. Please think over this aspect once again.>> 2. In case you have any case law to support the contention thattime-barring, and consequent unilateral write back is not aremission as contemplated by section 41 of IT Act, please pass it on.>> 3. Section 56, in its preset form, probably applies to moniesreceived after 2004. In this case, all the monies were actuallyreceived before 2001. Please confirm in that case if the sectionwill apply.>> Thanks and regards;>> CA. Pramod Goenka

Write-back of Loans and Section 41(1)

2009-03-02T22:59:00.000-08:00

Dear Pramodji,

First of all, we write OFF a debit balance in an account; but ifit's a credit balance that's no longer payable, we write it BACK.It's important to understand the linguistic semantics in play herein order to keep confusion at bay.A query exactly similar to yours will be raised when we are facedwith a situation where an assessee has had some amount he owed tothe bank on account of a C/C limit written off by the bank inpursuance of a rehabilitation package to nurse the ailing unit backto health. The interest component in the C/C account will without adoubt be treated as deemed profits chargeable to tax u/s 41. Thesine qua non for taxing receipts under section 41 is that at somepoint of time in the past, the amount sought to be taxed should havebeen allowed to the assessee as an expenditure in the computation ofhis taxable income. Since this test is met, interest would betaxable u/s 41.But what about the principal amount itself? The capital of abusiness consists of owner's equity and the debt fund comprising ofC/C limits, term loans, etc. If some portion of the debt fund isn'tDebt anymore because the lender has waived it or like in your case,the borrower being unable to discharge it, has unilaterally decidedhe's not going to pay back this amount, then in that situation, whatwould be the treatment of the amount in the borrower's hands? Inthis year's Budget, the government waived loans owed to it by thefarmers. Would that amount be taxable in the farmer's hands? No,because the farmers' income isn't taxable anyway. But what would bethe status of such receipts in a non-agriculturist's hands?Let's examine this issue in the context of Section 41. We use a C/Climit to meet our working capital needs. We buy raw materials andincur other direct and indirect expenses by issuing cheques out ofour C/C account in the bank. Since all those purchases and expensesare Profit and Loss items and as such are claimed by us, in asituation of the unit turning sick and the bank waiving some portionof the loan, how can we say it isn't a cessation of tradingliability in terms of Section 41? The C/C limit certainly was inthe nature of a trading liability in the sense that we used it tobuy goods we trade in.You haven't mentioned what use the broker-assessee put the loans to?Since he was merely a broker, he can't have acquired any fixedassets, not to a substantial extent anyway. So presumably most ofthose borrowed funds were deployed in the day-to-day running of hisbusiness. Apparently, besides being a broker, he did proprietaryshare trading of his own and needed some additional money to pumpinto the market. And the fact that he pledged shares with thecreditors makes this a case similar to a C/C limit where the stockswe buy with the bank's funds are hypothecated back to the bank. Sothose loans he owed his clients were clearly in the nature oftrading liabilities because the debit aspect of those transactionsgot reflected in the P & L account and not the Balance Sheet. Whenyou take a term loan, say a loan to buy machinery, the debit aspectfinds its place in the Balance Sheet. So upon a waiver of such aterm loan by the lender, could this amount be brought to tax u/s 41(1)? Absolutely not. We shall discuss a case below that I believewould settle this issue.In Mahindra & Mahindra Ltd. v. CIT [2003] 261 ITR 501/128 Taxman 394(Bom.) the assessee had obtained a loan from a foreign company forthe purchase of machinery. For some reason or the other, the foreignlender waived the loan later. The AO wanted to tax the amount ofloan waived in the assessee's hands u/s 41(1). The Court ruled outthe applicability of Section 41(1) on the grounds that the assesseehad never claimed any deduction in respect of such loan at any timein the past. The assessee had invested the amount of loan in thiscase in buying Tools and Dies that constituted its fixed assets.Since the Tools & Dies were assessee's fixed assets, and not itsstock-in-trade, section 41(1) could not be invoked, the Bombay HCsaid.Now, had the Tools & Dies constituted the assessee's stock-in-trade,it is clear the decision of the Bombay HC would have been differentand the amount of loan waived would very well have been held to betaxable u/s 41(1) as a remission of a trading liability.So to me it seems the AO does have a case when he seeks to tax thoseloans your client has unilaterally written back as being no longerpayable. Section 41(1) in my view admits of waiver of loans thatconstituted our trading liabilities, i.e. loans with which weacquired the things we trade in.You've said that some of those loans had become time-barred. We havehad cases in the past where the courts have ruled that in case ofwrite back of time-barred debts, Section 41 couldn't be invoked.This is because this is neither cessation nor remission of a tradingliability. A unilateral write back by the borrower doesn't amount tocessation—a liability ceasing to exist—or remission—waiver by thecreditor. Upon a debt becoming time-barred, the debtor loses hisright to enforce the debt through a court of law, but the liabilityas such doesn't cease to exist, the courts have ruled. But with theaddition of Explanation 1 to Section 41(1) w.e.f 01.04.1997, thosejudgements have been rendered ineffectual.To conclude, let me reiterate: "An allowance or deduction in anearlier year" is the very soul of Section 41(1). To know whetherthis has happened in your case, you would need to track the user ofthe funds within the business—where did the assessee spend thoseamounts? You said "that is not the case here"—are you sure there'sno nexus in the books of account between a claim of an expense andthe utilization of those loans? The burden of proof, however, that adeduction or allowance has been allowed to the assessee in the pastis on the revenue and not on the assessee, the Delhi HC said inSteel & General Mills Co. Ltd. v. CIT [1974] 96 ITR 438 (Delhi).If the AO is able to prove that a deduction or allowance has beengranted to the assessee in respect of those loans and you aren'table to counter it, the amounts written back on account of loans nolonger payable would constitute your income u/s 41(1).Another Section that comes to mind is Section 56. It's been quite awhile since the Gift Tax reincarnated itself in its new avatar inSection 56 of the I T Act. Gifts of money exceeding Rs 50k inaggregate are taxable in the recipient's hands. If I were the AO, Iwouldn't hesitate to invoke Section 56 in a case where I see loansfrom people not related to the assessee being written back onaccount of being no longer payable. Who knows the whole thing may bea façade. The loan was a mere smoke-screen; you never intended topay it back and the lender never intended to get it back from you.It was a gift of money from the very beginning camouflaged as a loanand hence taxable u/s 56!All the best,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, PRAMOD GOENKA wrote:>>> Dear Sanjeev ji;>> This is a query directed to you personally since I believe you areexperienced/learned enough to answer this. That does not excludeothers from giving their views on the issue; rather it is welcome.>> A person is a share broker (with membership of one of theexchanges) and runs business under the name of a proprietoryconcern. Before 2001, he took loans from many of his clients. Tomany of his creditors, he gave shares as security for loan taken bytranferring the shares to their demat account. Some of the creditorswere totally unsecured. In 2001, the share market crashed, and thevalue of the shares held by the broker/creditors came down. Thecreditors started asking for their money which the broker was unableto pay. Some of the creditors went to court and other appropriateforum from recovery of their money, but most of the creditors didnot do so.>> Now, in 2006, the broker decided that he is not going to be ableto pay back to his creditors. He therefore, wrote off all the loanswhere there were no court cases and which had been barred bylimitation by transferring the loans to his capital accountdirectly. In some cases, where the loans were secured by shares, thestock of shares (to the extent pledged to each individual creditor)was adjusted against the loans. Some other assets, that had lost allits value like junk shares and certain deposits were againtransferred directly to capital account. Thus, the broker did notsurrender the loans written off for taxation nor did he claim anydeduction for written off assets. The case pertains to theassessment year 2006-07 and is under scrutiny.>> The assessing officer wants to tax the loans written off. Can hedo so ? Under what section ? One section that comes to mind issection 41 - ceasation of liability. But that section requires aprior claim of some loss/expenditure and its subsequent ceasation.That is not the case here.>> Please guide me.>> Thanks a lot.>> CA. Pramod Goenka

No Ownership of Asset--No Allowance of expenses?

2009-03-02T22:50:00.000-08:00

Hi Mr A K Singh,

What is meant by the word "owned" within the context of Section 32of the I T Act is commercial ownership. The word "owner" isn't to beinterpreted in a manner as to mean that unless you possess some sortof documentary evidence in support of your claim to be the owner ofthe machinery, plant, etc, you'd be denied depreciation and otherexpenses incurred in the running and maintenance of the asset.Particularly in case of a proprietary concern there shouldn't be anyproblem at all. Besides Section 31, under which section you'reseeking to claim the expenditure on repairs of machinery doesn'ttalk about ownership at all. As long as the machinery has beendeployed in the business, it matters little who owns it. You couldhave incorporated the replacement cost of the machinery in theBalance Sheet of the proprietary firm to forestall any objection atleast on account of expenditure on repairs and maintenance. At themost the AO could have withheld depreciation on account of therebeing no evidence to ascertain the actual cost in terms of Section43. But expenses towards repairs, inevitable as those are in nature,can never be denied to the assessee in such a situation. The ground—lack of ownership--on which the AO is basing his disallowance ofexpenditure on repairs is too shaky.A tenant is allowed to claim expenses incurred on repairs tobuilding he occupies because the test of User trumps the test ofOwnership. It's the user of the asset, and not the ownershipthereof, that matters in the allowance of expenses under our taxlaws.The Supreme Court in the case of Mysore Minerals Ltd. v. CIT [1999]239 ITR 775 / 106 Taxman 166 (SC) has held that where the assesseedidn't have any registered deed in its name evidencing the ownershipof the building on which it had claimed depreciation, depreciationwas to be allowed to the assessee. What mattered, the court said,was who had the right to use the asset by virtue of having anexclusive dominion over the asset to the exclusion of everyone else.If this test was fulfilled, depreciation couldn't be denied to theassessee.Now if depreciation, which entails writing off the actual cost ofthe asset, can be claimed in the absence of a legal ownership,there's no reason why the claim of expenditure towards repairs andmaintenance of plant and machinery, which even a person who's hiredthose assets will have to incur, should be held back from theassessee.The ITO isn't following the law.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, adamya singh wrote:>> DEAR ALL,> MY CLIENT IS A PROP FIRM. IT IS A MFG UNIT HAVING A SALES OF 38LACS. NO PLANT MACHINERY IS ISHOWN IN FIRM BALANCE SHEET.> MY QUERY IS-> 1.CAN WE CLAIM EXPS INCURRED IN DIESEL ETC IF MACHINERY ISEXISTING IN PROP INDIVIDUAL NAME.> 2. IS THERE ANY CASE LAW ON THE SUBJECT . PLEASE PROVIDE.> 3. ITO IS SAYING TO DISALLOW THE EXPS ON FUEL,> THANKS> AKSINGH> Â

TDS on Car Repair--Amt borne by Insurance Co.

2009-03-02T22:49:00.000-08:00

Hi Jagdeesan and Anoop,

An important word to note in Section 194C is "responsible". TDS isto be made by the person who's responsible for making the payment tothe contractor. In this case, since the company had taken out aninsurance policy on the car, the primary responsibility to meet theexpenses arising out of getting the car fixed up consequent to anaccident lay on the insurance company. True, the bill was raised bythe Repair Shop in the name of the company. But I don't think theinsurance company acted as an agent of the assessee company whilstmaking the payment to the repair shop. It was discharging its ownliability and therefore duly made the TDS on its part of the burdenof expense.Even if the same amount being subjected to tax twice isn't a goodenough argument here, it still doesn't seem the company can be madeliable to make TDS on the amount it never paid and never wassupposed to pay. The repairer should have raised a net bill of Rs15000 on the company after it'd got Rs 185000 from the insurancecompany. So we'll book an expense of only Rs 15000. But the repairerseems to have raised the entire bill of Rs 200000 in the name of thecompany without reflecting therein any adjustments on account ofpayment already realized from the insurance company. Still, I feelTDS, if at all it is deductible, need be deducted only on Rs 10000.These repair and insurance agreements these days are mostlytripartite in nature, the parties being the assessee, the repairerand the insurance company. The insurance company stepped into thepicture the moment the car met with an accident; it didn't reimbursethe amount to the assessee company. If the assessee had got thecheque for Rs 185000 from the insurance, crediting it to CarExpenses account, then I might have had a different opinion on this.Anyways, if this was a one-off payment, then the discussion we arehaving is merely academic in nature. TDS u/s 194C isn't required tobe made if the individual payment doesn't exceed Rs 20k and theaggregate during the year is below Rs 50001.Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_CA@yahoogroups.com, Anoop Bhatia wrote:>> Dear Mr. Jagdeesan>> It's an interesting query. I may say if bill of Rs.50000/- is madein the> name of company and the company books an amount of Rs.50000/- inits books> as expenditure of repairs of car as well as it books the claimreceived> from the insurance company to the tune of Rs. 40000/- (which isreceived by> way of direct payment to the repair agency by the insurancecompany) the> TDS on the balance payment of Rs. 10000 should be applicable.>> But if bill is booked with an amount of Rs.10000/- only and noamount is> shown in the books as receivables from the Insurance company onaccount of> insurance claim, I may say TDS may not be applicable.>> But in TDS one may follow a golden rule, "in case of doubt deductthe tax> at source". So being on a practical side I suggest to deduct TDSu/s 194C.>> I know some memeber may not be agreeing to the opinion framed byme, their> valuable opinion on the issue is welcome.>> Warm regards>> Anoop Bhatia> Jaipur>>>>> Dear Esteemed Members,>> A car owned by a company met with accident and it was> sent for repair. The repairer sent quotation and as> per the quotation Rs. 1,50,000 is payable towards> material cost and Rs. 50,000 is payable towards> labour.>> Insurance company sanctioned Rs. 1,45,000 towards> material cost and Rs. 40,000 for labour charges> relating to repairing the vehicle. The insurance> company paid the above amount directly to repairer and> deducted TDS on Rs. 40,000 being the labour charges it> sanctioned.>> The balance amount of Rs. 15,000 is payable by the> company to the repairer.>> The query is while making the balance amount of Rs.> 15,000, whether TDS is be made on the entire labour> charges of Rs. 50,000 or TDS is required to be made on> the balance Rs. 10,000 (Rs. 50,000 - Rs.40,000 - TDS> made by the insurance company).>> Regards,>> V. Jagadeesan.>>>>>> Disclaimer :The information contained herein (including anyaccompanying documents) is confidential and is intended solely forthe addressee(s). If you have erroneously received this message,please immediately delete it and notify the sender. Also, if you arenot the intended recipient, you are hereby notified that anydisclosure, copying, distribution or taking any action in relianceon the contents of this message or any accompanying document isstrictly prohibited and is unlawful. The organisation is notresponsible for any damage caused by a virus or alteration of the e-mail by a third party or otherwise . The contents of this messagemay not necessarily represent the views or policies of HousingDevelopment Finance Corporation Limited.>

TDS on foreign artists in India

2009-03-02T22:47:00.000-08:00

Hi Naresh,

If we refer to the Income tax Act alone, it'd seem the income of aforeign artist performing in India is taxable here. But we can'tdetermine the taxability of income of a foreigner in India withoutconsulting the DTAA India has with her country. Services rendered bya performing artist amount to "Independent Personal Services" asreferred to in the DTAA. I quote below the relevant Article of theIndia-Australia DTAA:[ARTICLE XIV - Independent personal services - 1. Income derived byan individual or a firm of individuals (other than a company) who isa resident of one of the Contracting States in respect ofprofessional services or other independent activities of a similarcharacter shall be taxable only in that State unless :(a) the individual or firm has a fixed base regularly available tothe individual or firm in the other Contracting State for thepurpose of performing the individual's or the firm's activities, inwhich case the income may be taxed in that other State but only somuch of it as is attributable to activities exercised from thatfixed base; or(b) the stay by the individual or, in the case of a firm, by one ormore members of the firm (alone or together) in the otherContracting State is for a period or periods amounting to orexceeding 183 days in a year of income, in which case only so muchof the income as is derived from the activities of the individual,that member or those members, as the case may be, in that otherState may be taxed in that other State.2. The term "professional services" includes services performed inthe exercise of independent scientific, literary, artistic,educational or teaching activities as well as in the exercise of theindependent activities of physicians, surgeons, lawyers, engineers,architects, dentists and accountants.]So unless the Australian artist coming down to perform in India hassome sort of a permanent base here, her income can't be taxed inIndia. It'd be taxed in Australia only. The relevant clause in theIndo-UK DTAA reads virtually the same, except the period of stay inIndia before their income from performances in India becomes taxablehere, in the case of the UK, is 90 days.So, income of the English and Australian artists coming to India forgiving performances won't be taxable in India by virtue of theprovisions of the DTAA India has with these countries. I don't knowwhere you got the TDS rate of 10% from. This is the rate prescribedu/s 194J for making TDS on payments to professionals, who areRESIDENTS. And those artists aren't resident in India. If at all TDSwould be applicable here, Section 195 would be the governingsection.Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_CA@yahoogroups.com, "CA.Naresh" wrote:>> Dear All>> My client is into Event mamngement. He wants to bring dome foreignArtist from Australia and U.K to perform in India for a week. He hasenquired about the TDS liability .>> In my view TDS shall be deducted @10% plus sc & cess. However myclient says that the professionals are not willing to deduct TDS asthere is no tax on them in their country.>> Please give your views if there is anyway out or can they claimrefund on account of DTAA.>

Excess Deposit of TDS--The Remedy

2009-03-02T22:44:00.000-08:00

Hi Subodh,

Clearly, an additional Zero was added whilst depositing the TDS onthe net, the client ending up paying 10 times the amount he wasliable to pay! Such are the hazards of online payments.You haven't said which section was the tax paid under—194A, C, H, J,etc? Actually we do have a CBDT circular on this. It was issued wayback in 1980, on October 21. The Circular number is 285. Itmentioned sections 192 to 194D and laid down the procedure for claimof excess TDS deposited by the assessee under any of sectionsfalling between 192 and 194D. Sections requiring TDS on commission(194H), professional payments (194J), Rent (194I), etc weren't invogue back then. But that the circular intended to cover the entiregamut of TDS on payments to residents seems obvious from the mannerin which sections are mentioned—rather than mentioning the sectionsindividually, the Circular gives us the "range" of sections—192 To194D. So relying upon the rule of beneficial construction, I thinkwe can safely extend the application of Circular No 285 to taxwithheld on all kinds of payments made to residents.I quote below relevant paras of the Circular:[1. The Board have been considering the manner of refunding theamount paid in excess of the tax deducted and/or deductible(whichever is more) under sections 192 to 194D of the Income-taxAct. The Board are advised that such excess payment can be refunded,independently of the Income-tax Act, to the person responsible formaking such payment subject to necessary administrative safeguards.3. The excess payment would be the difference between the actualpayment made by the deductor and the tax deducted at source or thatdeductible, whichever is more. This amount should be adjustedagainst the existing tax liability under any of the Direct Tax Acts.After meeting such liability the balance amount, if any, should berefunded to the assessee.5. The adjustment of refund against the existing tax liabilityshould be made in accordance with the present procedure on thesubject. A separate refund voucher to the extent of such liabilityunder each of the direct taxes should be prepared by the Income-taxOfficer in favour of the "income-tax department" and sent to thebank along with the challan of the appropriate type. The amountadjusted and the balance, if any, refunded would be debitable underthe sub-head "Other refunds" below the minor head "Income-tax oncompanies"—major head "020—Corporation Tax" or below the minorhead "Income-tax other than Union Emoluments"—major head "021—Taxeson incomes other than corporation tax" according as the payment hasoriginally credited to the major head "020—Corporation tax" or themajor head "021—Taxes on incomes other than corporation tax".]Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_CA@yahoogroups.com, subodh agrawal wrote:>> One of my clinet has deposited TDS Rs. 70000/- instead of Rs.7000/- in the month of December 2008, Now what remedy is to getrefund of Rs. 63000/- excess deposit of TDS.> Â > FromÂ CA Subodh Agrawal, Satna>

Mr Capital Asset--How old are you?

2009-03-02T22:41:00.000-08:00

Hi Mr Madhu and everyone,

I am more inclined towards the majority opinion here. Theword "month" hasn't been defined in the Income Tax Act. The GeneralClauses Act defines "month" to mean a month reckoned according tothe British Calendar. This merely means that we can't refer to theHindu Samvat Calendar (I think 14th Jan is the first day of the yearaccording to the Hindu Calendar), or some other Calendar, fordetermining the period of holding for calculating capital gains taxon the sale of assets. We shall have to abide by the BritishCalendar.Now, when does a month begin and when does it come to an end? Like Isaid the reference to the British Calendar month in the GCA doesn'tmean the clock will start ticking for an asset on the first day ofthe month, even if the assessee bought the capital asset in themiddle of the month; nor does the assessee have to wait till thearrival of the 14th month (April—May) (38th in case of assets otherthan shares) in order to have the CG treated as LTCG. A month I feelfor the purposes of determining whether a CG is LT or ST comprisesof a period of 30 days. In other words, 12 months means 365 days.Had the intention of the legislature been any different, thenwouldn't it have inserted a Rule on the lines of Rule 119A of theIncome Tax Rules 1962? Rule 119A says for the purposes of levy on,as well as payment of interest to, the assessee a fraction of amonth shall be reckoned as the full month. So if you're required tofile your return latest by 31st July, but wake up only on the 1stSeptember, you'd be supposed to deposit two months' interest u/s234A.In the absence of any such mandate in respect of determining the ageof capital assets, I think a period of 12 months will be reckoned inthe same way as we reckon the age of a human being. A baby born on15th April 2007 will turn 12 months old on 14th April (Yes 14th andnot 15th!) 2008. So shall the shares or any other capital asset forthat matter.Madhuji, I am curious to know the ruling you're saying you know ofthat laid down that a fraction of a month had to be rounded off toone month for determining the age of a capital asset. It thereindeed is such a ruling, it'd be applicable to all sorts of capitalassets and not to shares alone.Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_CA@yahoogroups.com, madhu tapuriah wrote:>>> For the purpose computing period of holding in case of shares 12months means 12 alendar months and not 365 days.There has been aruling on this issue.I will let you know in due course.>> Regards> CA Madhu Soodan Tapuriah> --- On Tue, 20/1/09, RAJEEV AGARWAL wrote:> From: RAJEEV AGARWAL > Subject: {amresh's-CA's} period for Short term capital gain> To: ICAI_CIRC_MEERUT_CA@yahoogroups.com> Date: Tuesday, 20 January, 2009, 7:52 PM>>>>>>>>>>>> Dear Group members,>>>> My query is regarding time period on short-term capital gain.>>>> As per section 111-A,read with section 2(42A) a short term capital>> gain will be for a period less than 12 months, where securitiesare>> listed. Hence if a person purchased any share on 15th April 2007and>> sold it on 17th April 2008, whether it will amount to long-term>> capital gain or short-term, as the transaction has not concededfull>> 12 calendar completed months.>>>> Kindly enlighten whether 12 months means 365 days or 12 calendar>> months.>>>> Thanks in advance.>>>> CA Rajeev Agarwal,>> Agra>>

Going Concern going downhill

2009-03-02T22:39:00.001-08:00

Hi Syam,

The Going Concern assumption clearly got rebutted the moment thecompany decided to wind up its business. Has the company passed aresolution authorizing the Board to dispose off the company'sassets?As an auditor, in the event, you're supposed to follow SA 570 akaAAS 16 titled "Going Concern". Since the Going Concern is no longervalid here, the question before you is how to go about signing theaudit report. Had there been a Going Concern uncertainly, you wouldhave been advised to express a disclaimer of opinion. But now thatthe company has on record decided to call it a day, you'd be calledupon to express an opinion that properly brings this to light. Youshould go through the second-last para—numbered 18—of the SA 570.Deviating from the normal format of the audit report, you shouldunambiguously state that the going concern assumption, which happensto be one of the fundamental accounting assumptions—apart fromConsistency and Accrual—in the preparation of financial statements,no longer holds good in the case of the company.Do not state that subject to the fact of the GC being inappropriate,the financial statements present a true and fair view. That would beakin to a doctor issuing a health certificate to a patient: Subjectto the fact the patient has full-blown AIDS and is liable to die anymoment, he is maintaining good health!Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_CA@yahoogroups.com, syamsunder v wrote:>> Dear Members,> I need clarification/suggestion in the following case.> A private Limited Company engaged in the business of Hospital,intends to wind up, as it wsa not able to do profitable business.In the meantime, it got a buyer who is prepared to buy all fixedassets consists of Plant & Machinery and Furniture & Fixtures. Inthe event if the company sells all its fixed assets, will it have aneffect on Going Concern concept. The company do not have anycurrent assets other than Cash & Bank balances and Deposits. If thegoing concern concept is going to be effected as per AccountingStandard, how the same has to be reported in Accounts.> kindly clarify.> Thanks> CA Syam Sunder V> Hyderabad

Going Concern going downhill

2009-03-02T22:39:00.000-08:00

Query on Private trust

2009-03-02T22:35:00.000-08:00

Hi Anoop,

This is quite a settled issue. I had answered a similar query about a year back. You may go through Message No 22767. The income of the trust set up for the benefit of the minor can never be taxed in the hands of the parent. The trust is an assessee in its own right. Setting up a trust for the benefit of the minor is the recommended way to bypass the provisions of Section 64(1A).

We have the judgement of CIT Vs M R Doshi [1995] 211 ITR 1 (SC) to confirm the above view.

And the fact that the grandfather has floated the trust wouldn’t make a difference—the income of the trust will be always taxable in the trust’s hands, and never in the trustee’s hands. In any case, even if the grandfather directly transfers a source of income to his grandchild, there can be no clubbing. Section 64(1A) doesn’t apply to transactions between grandparents and grandchildren.

Thanks,

CA Sanjeev Bedi--- On Fri, 1/30/09, Anoop Bhatia wrote:
From: Anoop Bhatia Subject: Query on Private TrustTo: "Sanjeev Bedi" Date: Friday, January 30, 2009, 11:32 AMRespected Sanjeev ji
I wanted to know the treatment of taxation of income of a trust which is
created by a father for benfit of minor son. Does the income in such cases
revert to the hand of parent or it will remain seperately taxable in the
hands of private trust only. The question assumes significane in the wake
of usage of private as a tax planning tool, becuase if a parent directly
trasfers some source of income to the minor the income will revert for
taxation in the hands of parent only (assuming that such parent has higher
income to the other). So here in place of transferring the source to minor,
if it is transferred to a private trust would still clubbing provisions of
section 64(1A) prevail.
In above case if the trust is created by Grand Father for the benefit of
minor Grand Son, the clubbing will be done in the hands of Father (i.e.
Parent) or it will remain taxable in the hands of trust only.
Now my query is, if income in both the cases mentioned above becomes
taxable in the hands of parent and not in the hands of trust then what is
the sense of creation such trust. Your valuable opinion on both the matters
is solicited.
I have raised this query in group forum but could not get a to-the-point
reply, hence seperately writing to you. May be while answering this query
you may mark a copy to gruop for the benefit of all.
Warm regards
Anoop Bhatia
Jaipur

Service Tax refund to exporters

2009-03-02T22:34:00.000-08:00

Hi Rajeev,

41/2007 dated 06 Oct 2007 is the Mother Notification for the refundof service tax to the exporters. A number of notifications have beenissued subsequent to this one adding more services on which claim ofrefund of service tax may be sought. The first thing you've got todo is fill up Form attached as an appendix to the above notificationsetting out details of your client firm. This Form is required to befilled in order to be allotted a STC (Service Tax Code).I would just give you the broad category of services on which thepayment of ST is eligible to be claimed back. Nearly all exporterspay a fee to an Inspection Agency for supervising the stuffing ofthe containers. The service tax paid on this fee is refundable(Section 65(105)(zzi)—Notif 41/2007). Service tax paid on Railwayfreight paid to the Container Corp of India is refundable (section 65(105)(zzp)—Notif 41/2007). Service tax paid on Letter of CreditAdvising/Amendment charges and Service tax charged by bank oncharges towards collection/negotiation of documents is liable to berefunded (section 65(105)(zm)—Notif 17/2008 dt 01st April 2008). Theservice tax element included in Forward booking and cancellationcharges is also eligible to be claimed as refund vide Notif 24/2008dated 10 May 2008. Commission paid to a foreign agent is alsoeligible to be claimed back (section 65(105)(zzb)—Notif 17/2008.Service tax paid to Customs House Agent will be refunded to you videNotif 17/2008.ST paid on Courier charges paid towards sending export samples tothe buyer will be reimbursed to you (section 65(105)(f)—Notif 3/2008dated 19 Feb 2008.You can access all these notifications by logging on towww.servicetax.gov.inThe exporter pays sea freight through the clearing and forwardingagent. The C & F Agent charges us Terminal Handling Charges over andabove the reimbursement of Ocean freight paid by him in dollars tothe Shipping Line. On the THC he charges us Service tax. Since theTHC is also a reimbursement (although owing to the C & F agent'sinability of furnish any proof of this payment being a merereimbursement, we have no choice but to subject the THC to TDS), itrightfully goes to Shipping Line. So it is really service tax paidin connection with transportation of goods from the Inland ContainerDepot to the Port of Export (section 65(105)(zzp)), which is aneligible service under Notif No 41/2007. But the Commissioners aredenying refund of ST on the THC paid to the clearing agents on thehyper-technicality that the payment made doesn't precisely fit intothe nature of payment specified u/s 65(105(zzp) because the C & Fagents haven't got themselves registered under this section of FA1994. Since the exporters do not get to deal with the Shipping Linesdirectly, they tend to lose out on the Service tax paid to C & Fagents for no fault of theirs. But you may still lodge this claim.However, we recently have had another notification come out--NotifNo 33/2008 dated 07 December 2008. This Notification seeks to allowclaim of refund of ST paid to Clearing and Forwarding agents u/s 65(105)(j). So it seems we won't be able to press our claim for STrefund on THC paid to C & F agents prior to 07 December 2008?The claim has to be lodged within 60 days of the end of eachquarter. But I think this period has been extended to 6 monthsrecently (Don't think the government has any altruistic intentionsbehind this move—it just wants to defer the refund for as long as itcan; the longer the exporters take to claim the refund; the longerthe government gets to sit on our money!). You'll have to do a greatdeal of paper work. Have you Photocopier serviced. A bulky filecontaining copies of bank-attested invoices, Bills of Lading, BankRealization Certificates and copies of each of the bills/receiptsevidencing the payment of ST will have to prepared and submitted.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, "RAJEEV AGARWAL" wrote:>> Dear group members,>>>> I have a query regarding service tax refund to exporters.>> As per circular no.41/2007 dt.06/10/07, exporters are allowed toclaim> service tax refund on service tax paid by them. Now my query is on> which services this refund is allowed and also kindly forwardrelevant> forms and procedure to claim this refund.>> Whether this ervice tax refund is also applicable on commission> payments by an exporter.>> Thanks in advance>> CA Rajeev Agarwal> Agra> 983700-2731>

More on Share Warrants, Share Certificates and Capital gains

2009-03-02T22:26:00.000-08:00

Dear Pramodji,

Mea culpa! :(Actually my understanding of Share warrant was a hangover from my CAIntermediate days! I failed to apply my mind to the problem andquoted Section 114, which section clearly states that share warrantscan be issued only in respect of FULLY-PAID shares. In the instantcase, the assessee had paid Rs 2.50 per share some two-and-a-halfyears back. The shares were partly-paid up. It was only on 20 April2008 when the remainder of the face value was paid that the sharesturned fully paid-up, capable of being converted into share warrantsu/s 114. But till those shares were partly paid-up, Section 114 hadno business being invoked!All the same, I do think the term "Share Warrant" is a misnomerhere. It'd better be avoided. What X Ltd had got in this case was aCall Option like the ESOP. They had an option to or not to buy theshares when the time to exercise that option arrived. If indeed thisis how it was, then clearly, Mr Milind Shah, the original querist,isn't using proper terminology to describe the problem when hesays "X Ltd purchased warrants of Y Ltd on 30.09.2006 for Rs 2.50".It is liable to be interpreted as the price of the shares havingbeen paid in parts over a two-year period—Rs 2.50 being the firstcall and Rs 7.50 being the second call along with a premium of Rs15.Regarding the taxability, let's see what the CBDT in its Circular No9/2007 dated 20 Sept 2007 states in answer to the FAQ 17:[17. Whether ESOPs issued to non-executive directors or non-employees liable to FBT?Answer: Benefit arising out of ESOPs issued to non-employees willnot be liable to FBT. However, in such cases, the taxability of suchbenefits in the hands of the non-employees will be determined inaccordance with the existing law. ]So the taxability of the stock options in the hands of non-employeeswill be determined in accordance with the existing law. What is theexisting law on the taxability of stock options—does the Optionitself constitute a capital asset and therefore liable to be taxedas CG upon its exercise? In the absence of concrete information inthis particular case, I am not sure if X Ltd had the right tofurther transfer that option to a third party. To determine whetherwe have relinquished our rights in a capital asset, first we have toascertain whether we had a Capital Asset to begin with. And as Idiscussed in my previous post, the Option (or Warrant, if you like)had to be a "Marketable security" of the nature like the shares,scripts, the stocks, the bonds, et al. A capital asset in terms ofSection 2(14) of the I T Act can qualify to be so only if it'scapable of being held and transferred like any other item ofproperty. If it isn't, then I don't see how can there be an occasiongiving rise to CG tax when the option to buy shares is exercised.Yet again, there's a need to look more at the substance of thetransaction rather than its form. And without prejudice to what Isaid in my first para, there still could be a possibility that Rs2.50 was merely the first call, the shares—in substance though notin legal form—having been bought on 30 Sept 2006 itself. In thatevent, the gain will be an LTCG.Actually, I am a little skeptical to take the terminology used insome queries at its face value. In many cases, the terms don't meanwhat we traditionally understand them to mean. So it's important tocut through the fog of misleading terms to look at what thetransaction really is.Thanks a lot Sir.CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_CA@yahoogroups.com, PRAMOD GOENKA wrote:>>> Dear CA. Bedi>> With due respect, I disagree to equating warrants with shares. Awarrant gives one an entitlement to apply and get shares - in thecase cited by Mr. Milind, the warrant holder had to pay Rs. 22.50per share to get the share. The warrant holder could have very wellchosen not to exercise the option - in that case, Rs. 2.50 paid byhim for acquisition of the right to apply for shares would havelapsed and he would have incurred the loss to that extent only. Instock market terminology, both of these are never equated.>> Sec. 114 of the Companies Act talks about a different conceptaltogether, as you have rightly said, making the shares transferableby delivery instead of by registration of transfer deed. There werehardly any companies that issued warrants that way. Presently, theterm warrant is used to describe an entitlement to the apply for theshares, a route initially used by many companies to make their non-covertable debentures attractive by linking such warrants to thedebentures.>> Probably, the confusion is due to use of one term for two entirelydifferent things.>> With the concept of warrants as understood by me, I reiterate thatperiod of holding of shares will commence only on the date whenthese were actually allotted by the company, and there will be aseparate tax issue invovled in taxability of warrants when thesewere extinguished on exercise of option.>> CA. Pramod Goenka>> Hi MKK, Since a Share Warrant is a creature of the Company law, Ithink we need to examine the meaning of a Share Warrant in thecontext of the Companies Act to better understand what it really is.Here's what Section 114 of the Cos Act states:[114. (1) A publiccompany limited by shares, if so authorised by its articles, may,with the previous approval of the Central Government, with respectto any fully paid-up shares, issue under its common seal a warrantstating that the bearer of the warrant is entitled to the sharestherein specified, and may provide, by coupons or otherwise, for thepayment of the future dividends on the shares specified in thewarrant.(2) The warrant aforesaid is in this Act referred to asa "share warrant".(3) A share warrant shall entitle the bearerthereof to the shares therein specified, and the shares may betransferred by delivery of the warrant.]So a share warrant ISN'T inmy opinion a Rights Entitlement. It is a Right in itself. The sharewarrant is a kind of a bearer cheque, whilst a share certificate(demat or physical) is akin to an account payee cheque. The holderof a share warrant is an anonymous shareholder. Since the holder ofa share warrant is entitled to dividend on the shares specified onthe warrant, it stands to reason that he's the de facto owner of theshares, though he isn't a member by virtue of Section 2(27). And sub-section 3 above even speaks of how the transfer of the shares may beeffected by mere delivery of the warrant. So clearly a Share warrantconstitutes an asset at least as far as the Companies Act isconcerned. A share warrant seems like a surrogate share certificate.It was invented to get around the cumbersome procedure that involvestransferring shares through a share certificate (although in thepresent-day Demat regime, share warrants seem like things of thepast). I don't see any reason why we should interpret thingsdifferently when we have to judge the taxability of the gains fromthe sale of share warrants under the Income Tax Act. But evenconsulting the Income Tax Act seems to lead us to the conclusionthat a Share Warrant is a capital asset. The proviso to Section 2(42A) that fixes the age of certain capital assets at 12 monthsafter which they turn "long-term", says:[……. in the case of a shareheld in a company or any other security listed in a recognised stockexchange in India…..]A security is defined u/s 2(h) of theSecurities Contracts (Regulation) Act 1956 as follows:[(i) shares,scrips, stocks, bonds, debentures, debenture stock or OTHERMARKETABLE SECURITIES OF A LIKE NATURE in or of any incorporatedcompany or other body corporate; (ii) Government Securities (iia)such other instruments as may be declared by the Central Governmentto be securities; (iii) rights or interests in securities;]So evenif we argue that Share Warrants are Rights, they would still amountto Securities in the view of the (iii) above. Since share warrantstoo are securities in terms of the proviso to Section 2(42A), thetime-clock for determining whether they're long- or short-termcapital asset would start ticking from the date of allotment of theShare Warrant. So as far as the taxation law is concerned, it seemsshare warrants and share certificates are two sides of the samecoin. Mr Goenka, I think no CG will arise at the time of conversionof warrants into shares. The transaction seems a mere ceremony—aKacha shareholder becoming a Pucca, registered shareholder. I can'tsmell anything resembling a relinquishment or exchange orextinguishment of rights in a capital asset. In my view, the CG willbe LTCG in nature and the cost will be indexed with reference to theyear in which incurred.Thanks,CA Sanjeev Bedi--- InICAI_CIRC_MEERUT_CA@yahoogroups.com, "M.K.KRISHNAN" wrote:>> > > Dear Mr.Milind Shah,> > Shares are ordinarily acquiredon the date of allotment and the> period of holding of such sharesbegins with the date of their> allotment. This rule equally applieswhere shares are allotted in> pursuance of the Rights Entitlement.Warrants are in the nature of> Rights Entitlement and the period ofholding of the shares issued in> pursuance of such Rights begin withthe date of allotment This is> confirmed by section 2(42A)(d) whichlays down the period of holding for> such assets as follows:> > "inthe case of a Capital Asset, being a share or any other> security(hereinafter in this clause referred to as the financial asset)>subscribed to by the assessee on the basis of his Right to subscribeto> such financial asset or subscribed to by the person in whosefavour the> assessee has renounced his Rights to subscribe to suchfinancial asset,> the period shall be reckoned from the date ofallotment of such> financial asset "> > Therefore I am of the viewthat on the facts explained by you the> sale of shares will beassessed as Short term Capital Gains only.> > Regards> >CA.M.K.Krishnan> > Vellore> > Tamilnadu> > > > > --- InICAI_CIRC_MEERUT_CA@yahoogroups.com, Milind Shah > wrote:>>> > Sir,> >> > But the warrants are held since 2006.> >> > Whatshould be the effect of that?> >> > Regards> >> > Milind Shah> >> >>> Since the Gains have arisen from the capital asset being theShares> (which> > is held for less than a year) - it would result inShort Term Capital> Gains.> >> > Regards, unni> >>> >> > Friends> >>> I have come across a very typical problem> >> > X Ltd haspurchased Warrants of Y Ltd. on 30.09.2006 for Rs.2.50> >> > Lateron 20.04.2008 the warrants get converted into Shares after> payingthe> > balance Rs.22.5 (F.V. 10 + Premium 15)> >> > Of the abovepart shares are sold on 20.10.2008 for Rs.35 off market.> >> >> >> >1. Now will it be Short Term or Long Term Gain?> > 2. This Gain canbe setoff against what loss?> >> > Please reply.> >> >> >> >Regards> >> > Milind Shah

Of Share Warrants, Share Certificates and Capital gains

2009-03-02T22:20:00.000-08:00

Hi MKK,

Since a Share Warrant is a creature of the Company law, I think weneed to examine the meaning of a Share Warrant in the context of theCompanies Act to better understand what it really is. Here's whatSection 114 of the Cos Act states:[114. (1) A public company limited by shares, if so authorised byits articles, may, with the previous approval of the CentralGovernment, with respect to any fully paid-up shares, issue underits common seal a warrant stating that the bearer of the warrant isentitled to the shares therein specified, and may provide, bycoupons or otherwise, for the payment of the future dividends on theshares specified in the warrant.(2) The warrant aforesaid is in this Act referred to as a "sharewarrant".(3) A share warrant shall entitle the bearer thereof to the sharestherein specified, and the shares may be transferred by delivery ofthe warrant.]So a share warrant ISN'T in my opinion a Rights Entitlement. It is aRight in itself. The share warrant is a kind of a bearer cheque,whilst a share certificate (demat or physical) is akin to an accountpayee cheque. The holder of a share warrant is an anonymousshareholder. Since the holder of a share warrant is entitled todividend on the shares specified on the warrant, it stands to reasonthat he's the de facto owner of the shares, though he isn't a memberby virtue of Section 2(27). And sub-section 3 above even speaks ofhow the transfer of the shares may be effected by mere delivery ofthe warrant. So clearly a Share warrant constitutes an asset atleast as far as the Companies Act is concerned. A share warrantseems like a surrogate share certificate. It was invented to getaround the cumbersome procedure that involves transferring sharesthrough a share certificate (although in the present-day Dematregime, share warrants seem like things of the past).I don't see any reason why we should interpret things differentlywhen we have to judge the taxability of the gains from the sale ofshare warrants under the Income Tax Act.But even consulting the Income Tax Act seems to lead us to theconclusion that a Share Warrant is a capital asset. The proviso toSection 2(42A) that fixes the age of certain capital assets at 12months after which they turn "long-term", says:[……. in the case of a share held in a company or any other securitylisted in a recognised stock exchange in India…..]A security is defined u/s 2(h) of the Securities Contracts(Regulation) Act 1956 as follows:[(i) shares, scrips, stocks, bonds, debentures, debenture stock orOTHER MARKETABLE SECURITIES OF A LIKE NATURE in or of anyincorporated company or other body corporate;(ii) Government Securities(iia) such other instruments as may be declared by the CentralGovernment to be securities;(iii) rights or interests in securities;]So even if we argue that Share Warrants are Rights, they would stillamount to Securities in the view of the (iii) above.Since share warrants too are securities in terms of the proviso toSection 2(42A), the time-clock for determining whether they're long-or short-term capital asset would start ticking from the date ofallotment of the Share Warrant. So as far as the taxation law isconcerned, it seems share warrants and share certificates are twosides of the same coin. Mr Goenka, I think no CG will arise at thetime of conversion of warrants into shares. The transaction seems amere ceremony—a Kacha shareholder becoming a Pucca, registeredshareholder. I can't smell anything resembling a relinquishment orexchange or extinguishment of rights in a capital asset.In my view, the CG will be LTCG in nature and the cost will beindexed with reference to the year in which incurred.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, "M.K.KRISHNAN" wrote:>>>> Dear Mr.Milind Shah,>> Shares are ordinarily acquired on the date of allotment and the> period of holding of such shares begins with the date of their> allotment. This rule equally applies where shares are allotted in> pursuance of the Rights Entitlement. Warrants are in the nature of> Rights Entitlement and the period of holding of the shares issuedin> pursuance of such Rights begin with the date of allotment This is> confirmed by section 2(42A)(d) which lays down the period ofholding for> such assets as follows:>> "in the case of a Capital Asset, being a share or any other> security (hereinafter in this clause referred to as the financialasset)> subscribed to by the assessee on the basis of his Right tosubscribe to> such financial asset or subscribed to by the person in whosefavour the> assessee has renounced his Rights to subscribe to such financialasset,> the period shall be reckoned from the date of allotment of such> financial asset ">> Therefore I am of the view that on the facts explained by youthe> sale of shares will be assessed as Short term Capital Gains only.>> Regards>> CA.M.K.Krishnan>> Vellore>> Tamilnadu>>>>> --- In ICAI_CIRC_MEERUT_CA@yahoogroups.com, Milind Shah > wrote:> >> > Sir,> >> > But the warrants are held since 2006.> >> > What should be the effect of that?> >> > Regards> >> > Milind Shah> >> >> > Since the Gains have arisen from the capital asset being theShares> (which> > is held for less than a year) - it would result in Short TermCapital> Gains.> >> > Regards, unni> >>> >> > Friends> >> > I have come across a very typical problem> >> > X Ltd has purchased Warrants of Y Ltd. on 30.09.2006 for Rs.2.50> >> > Later on 20.04.2008 the warrants get converted into Shares after> paying the> > balance Rs.22.5 (F.V. 10 + Premium 15)> >> > Of the above part shares are sold on 20.10.2008 for Rs.35 offmarket.> >> >> >> > 1. Now will it be Short Term or Long Term Gain?> > 2. This Gain can be setoff against what loss?> >> > Please reply.> >> >> >> > Regards> >> > Milind Shah

TDS on Audit fee--Who's the Payee?

2009-03-02T22:17:00.000-08:00

Dear Pradeep,

Interesting Question. So the company makes provision for audit feeat the end of the year; withholds and deposits tax on it; and hasalready uploaded Form 26Q mentioning the PAN and name of theauditor. But when it comes to actually conducting the audit, thecompany has changed its mind and appoints someone else to be auditor(by passing a special resolution in a specially convened EGM, I amsure).There have been case laws that said that where the identity of thepayee is not known, there is no need to make TDS when we makeprovision for the expense. But in this case, we can't pretend thatwe didn't know the identity of the payee—the auditor conductingaudit in the previous year is automatically reappointed in the AGM,unless removed by the shareholders. So the liability to deduct taxat source was there.Revising the TDS return is a good idea. Wrong names and PANs of thepayees often get mentioned in the e-TDS return. In that event also,it is advised to revise the TDS returns so that the payees don'thave any trouble in claiming TDS when their incomes are assessed.Although TDS isn't something that is negotiable, the practical wayout of this situation would be revision of the e-TDS return. Wecan't recover the amount of tax from the previous auditor since he'sgot no income to have that tax adjusted against.And although we do have a CBDT circular that says that TDS depositederroneously or deposited excess, can be claimed back by the deductorhimself, and can even be adjusted against the deductor's own advancetax liabilities, etc, invoking that circular isn't advisable in thiscase, since we have problem only with the payee's identity here, andnot with TDS as such.Regarding the problem in mentioning of the date of TDS while e-filing our ITRs, that's only a procedural problem to overcome forwhich we need to work out a practical solution rather than referringto sections. But I wouldn't agree with your thinking that "we had nochoice but to forget such tax which may of handsome amount". Notbeing able to claim TDS would mean enhancing our tax liability,which would be in violation of Section 205. Section 205 says thatwhere tax is deductible and has been deducted at source on anassessee's income, the revenue can't burden the assessee once againwith the tax that's already been deducted from his income. Whatabout a case where the deductor doesn't deposit the TDS or doesn'tfile the e-TDS return? Would the payee stand to lose the amount oftax that's been withheld from him from out of his income? Section205 seeks to protect the payees from the negligence of the payers.Section 205 will certainly be pressed into service to bail out theassessees in a case where there is a clash between the years whenthe payer deducted the TDS and the year in which the payee accountsfor the income.I shall try and have this thing sorted out after discussion with afew people and will get back to you if I have got somethingworthwhile to say.Thanks,CA Sanjeev Bedi--- In http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=8WAJVhgGD0UHc28FFrz-Rw1j-KQmU0A16-YS-S0X-aHGE5k6gDxjhDKcwMPAbK5p-6V6WrVSKj7kDhTmRI2IjxpDelqdTl-zFGL0hr8s, pardeep gupta wrote:>> Dear Sanjeev Ji> First of all i would like to thank 4 clarifying the matter sosoon. i m really surprised to see such a quick response from ur end.by the way thanks a lot.> may u please clarify wheteher there would be any change in case ofsystem of accounting is mercantile basis. i think there should beequally applicable, becoz either it is cash basis or mercantilebasis, we would book TDS in the year in which we are booking income.> Am I right?> I think until any rules being framed by the Government under subsection (3) to section 199, we may carry on the practice.> One more issue, if suppose a company deducts tax in name of one CAfirm while making provision of audit fee on 31st March 2009. andfile form 26 Q. Later on say the said CA firm doesn't conduct theaudit due to resignation etc.. Then wheteher it is suggested torevise the TDS return by the company and indulge the name of newlyappointed CA firm. > Moresoever In my personal opinion there should be amendment insec. 194 j that company (incl. other assessee) should be liable todeduct TDS on professional fee whenever they receive the bill fromthe concerned professioanl and not on basis of making provision.> In other words Explanation 3 to subsection 3 of sec. 194 J shouldbe abolished.> CA Pradeep Gupta> Haridwar> 09897238017> --- On Sat, 2/28/09, Sanjeev Bedi wrote:>> From: Sanjeev Bedi > Subject: {amresh's-CA's} Re: TDS on Audit fee> To: http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=8WAJVhgGD0UHc28FFrz-Rw1j-KQmU0A16-YS-S0X-aHGE5k6gDxjhDKcwMPAbK5p-6V6WrVSKj7kDhTmRI2IjxpDelqdTl-zFGL0hr8s> Date: Saturday, February 28, 2009, 12:05 AM>>>>>>> Hi Pardeep Ji,>> No issue at all here! You need to go through Section 199 of the IT> Act.>> It's been held in numerous Tribunal cases that credit for TDS isto> be given in the year in which the assessee (the recipient ofincome)> offers the income for taxation. Chartered accountants follow cash> system of accounting. Their auditee companies on the other hand> follow the mercantile system of accounting, which requires thatthey> provide for accrued expenses on 31st March. Now the year mentioned> on the TDS certificate, in case of TDS made on 31.03.2009, wouldbe> A Y 2009-10. But the payee would be accounting for that incomeonly> in the financial year 2009-10, the relevant A Y for which is 2010-> 11. So in the event, would he have any problem in claiming suchTDS> in his computation of income? No.>> But the FA 2008 has amended Section 199 to insert the followingsub-> section:>> [(3) The Board may, for the purposes of giving credit in respectof> tax deducted or tax paid in terms of the provisions of thisChapter,> make such rules as may be necessary, including the rules for the> purposes of giving credit to a person other than those referred to> in sub-section (1) and sub-section (2) and also the assessmentyear> for which such credit may be given]>> The power to make rules for the purposes of giving or denyingcredit> for TDS has been vested in the CBDT. I am not aware of any rules> being brought onto the statute book that have disturbed the status> quo. I think we shall still continue to be entitled to claimcredit> for TDS in the year in which we offer the income for taxation. IfI> follow cash system of accounting, I shall claim, and be allowed by> the AO, the TDS deducted by my clients on 31st March 2009, in my> return of income for the A Y 2010-11. TDS works on the matching> concept: you get to claim an amount of TDS only in the year inwhich> you submit for taxation the income upon which tax has beendeducted> at source.>> In Pradeep Kumar Dhir v. Asstt. CIT [2007] 107 ITD 118 (Chd.)(TM),> the assessee, a commission agent received commission from various> principals and TDS was made by the payers on accrual basis as soon> as they booked the commission expense. The commission agent sincehe> followed cash system of accounting accounted for the income only> after he'd actually received it. The Tribunal held that the TDS> claim was admissible as and when the assessee offered forassessment> the income subjected to TDS.>> The decision of the Mumbai Bench in the case of Toyo Engg. India> Ltd. v. Joint CIT [2006] 5 SOT 616 (Mum.) is also an instructive> one. In this case also, it became difficult to establish a nexus> between income and TDS, the assessee being engaged in providing> technical services and recognizing his income only on thecompletion> of a project. The Tribunal laid down the following rules:>> [The income or loss is the cumulative result of the workingcarried> on by the assessee and measured for each assessment year. There> could be no immediate or direct nexus between the incomechargeable> to tax and the tax deducted out of the payments made.>> Tax deduction is basically a machinery provision for collectingtax> on the potential income of the assessee. But there is noconclusive> presumption that tax is invariably deducted out of income. That is> why the expression is `tax deducted at source' instead of `tax> deducted from income'>> It is not possible to correlate the amount of TDS with a specific> amount of income earned by the assessee in a particular assessment> year. When section 199 says that credit shall be given for the TDS> on the production of TDS certificate for the assessment year for> which such income is assessable, it is implied that the nexus> between the TDS and the income would remain rather notional or> conceptual only]>> Based on the above discussion, I think we should have any problemin> claiming TDS deducted by a company on 31st March 2009 even if we> account for that income in the A Y 2010-11.>> Thanks,>> CA Sanjeev Bedi>> --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, pardeep gupta> wrote:> >> > Dear Sanjeev Ji> > I have joined the group very recently, and i have gone throughur> reply on various queries which are extremely helpful and logical.> After reading ur views I m really a big fan of urs. I will behighly> obliged if u please help me in clarifying a issue related to TDSon> Audit fee.> > > > As u know in every balancesheet a provision for audit fee isbeing> created on say as on 31st March of previous year. while we (CA)are> issuing the fee bill in the year we conduct our audit and charge> service tax (if applicable). Now if the company deducts TDS on> provision of audit fee (as is required by Sec. 194 J), how can we> (CA) can claim benefit of that Tax deducted by the compnay during> previous year while we would be able to show the same only during> next financial year when we actually conduct the audit and raised> fee bill. now if the company does not deduct tax on provision made> in books , we are liable to qualify our report. and if the company> deducts tax we are not able to claim the benefit of TDS.> > Could u please suggest the remedy for this practical situation,> since i think most of our member will be facing the same problem.> > > > CA Pradeep Gupta> > Haridwar> > 9897238017> >>

TDS on audit fee

2009-03-02T22:06:00.000-08:00

Dear Mr Guru Prasad,

Although I would like to, but I find it difficult to agree with yourinterpretation of the provisions of the Income tax law along withthe Company law regarding the nature of office of the auditor andthe need to make a provision for audit fee and the consequentrequirement to make TDS thereon.On 31st March 2009 the company will have an auditor holding officetill the conclusion of the upcoming AGM in September 2009. The listof circumstances you've listed like the death of the auditor;dissolution of the firm of auditors; management deciding to partways with the existing auditor, are only contingencies. In thenormal course of events, such things won't happen. We can't wriggleour way out of a situation requiring legal compliance by conjuringup hypothetical scenarios. Those things may happen, but those thingshaven't happened till they have happened! The case of IndustrialDevelopment Bank of India v. ITO [2006] 10 SOT 497 (Mum.). that youhave brought up had very different circumstances. The IDBI had madeprovision for interest at the close of the year, but they had noidea who the ultimate recipients of the interest amounts would turnout to be. The bonds on which interest was payable were freelytransferable and so the bondholder at the time of making theprovision could be different from the bondholder at the time offinal payment. In such an event, the Mumbai Tribunal held that theIDBI was exempted from the requirement to withhold tax on interestsince one can't deduct TDS on payments to anonymous people.The office of the auditor certainly isn't akin to a Bond of afinancial institution. Barring contingencies, there's a highlikelihood that the auditor of the previous year would be theauditor this year too and continue to hold office till theconclusion of the next AGM. On 31st March all those things werepurely hypothetical. In the IDBI case, the anonymity of the payeesof the interest was a reality on 31st March and not a hypothesis.So in my opinion, as the law contained in Section 194J stands today,TDS would need to be made on provision for audit fee, taking intoaccount only the reality subsisting on that day.Thanks,CA Sanjeev Bedi--- In http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=K2F4uKFXS6y82QT90PKbMHbkEEz-AHNKjBjxku7wH1gUv_lZ48DUHKguHW78xxljX0h2bG4_n2uBThPpLdcmFNe6azeceLPQMPZam-k, "Prasad & Suresh" wrote:>> Dear CA Vishal Guptaji,>> 1. The relevant report is attached.>> 2. My statement that the Auditor will be "indebted" to the companywas in the context of TDS being effected on 31st March - at whichpoint of time there will be no credit in the Auditor's account. TheTDS amount remitted by the company will result in a debit balance inthe Auditor's account. Such debit balance will continue till thedate the Auditor's bill amount is credited to his account.> If TDS were to be made upon completion of audit and receipt ofbill, then obviously the bill amount will be first credited to theAuditor's account, against which the TDS amount will be debited.There will therefore be no resultant "net debit" at any stage.>> The accounting sequence will be :>> On 31st March 08 - Debit Audit Fees / Credit Provision for AuditFees>> On 30th June 08 (assumed date of completion of audit & submissionof Report and Bill) - Debit Provision for Audit Fees / Credit ABC(Auditor)> On or after 30 June 08 - Debit ABC(Auditor) / CreditBank ..........for TDS made / remitted> On or after 30 June 08 - Debit ABC(Auditor) / CreditBank ..........for Net Amount paid>> Warm regards,>> CA Guru Prasad> Dear Guru Parasad Ji>> Kindly provide the complete citation of Mumbai ITAT for IDBIcase as mentioned by you.> Further please check how the TDS amount debited to auditor a/cwill be considered as "auditor" is indebted to the company. In myopinion if you are right then auditor will always be indebted to thecompany.>> Regards,> CA. Vishal Gupta>>> On 3/2/09, Prasad & Suresh wrote:>> A lot has been written about TDS on Audit Fees and how to takecredit for such TDS (when the Bill is raised only in the subsequentyear).>> My view is as follows –>> Companies do make a provision for Audit Fees in the accounts,at the close of the year. This is done in order to comply withmercantile system of accounting and to recognize the expenditure.>> Now let's examine the TDS issue :>> Unlike all other services, the Audit service is carried outafter the close of the year and not during the year. Therefore, theclaim for Audit Fees will arise only after Audit Report addressed toshareholders is received from the Auditor. It is only then that TDScan be effected and Form 16A issued. Even though a company may haveappointed or re-appointed an Auditor, there is no certainty that thesame Auditor will, in fact, carry out the audit for reasons such as(a) Resignation of the Auditor; or (b) Removal of Auditor; or (c)Death of the Auditor. If any such eventuality occurs after 31stMarch and before submission of Audit Report, a new Auditor steps in.Imagine the situation if a Form 16A in favour of the previousauditor is already doing the rounds !!>> Therefore, at the time a provision is made in the books (torecognize the expenditure), the identity of the beneficiary is notknown and hence TDS on Audit Fees cannot be made.>> In a similar context, in IDBI's case the Mumbai ITAT ruled asfollows :> "It is a sine qua non for vicarious tax deduction liabilitythat there has to be a principal tax liability in respect of therelevant income first, and a principal tax liability can come intoexistence when it can be ascertained as to who will receive or earnthat income. In this view of the matter, tax deduction at sourcemechanism cannot be put into practice until identity of the personin whose hands it is includible as income can be ascertained."> The correct step would be to effect the TDS only in the yearin which audit is complete and audit report is received. Therefore,for year ended 31 March, 08 TDS on audit fees should be effectedduring financial year 2008-09. There should be no fear ofdisallowance u/s 40(a) for the reasons cited above.>> Another interesting aspect is the implications under CompaniesAct if TDS is effected on 31st March itself – if the TDS amount wereto exceed Rs. 1,000 (which will be debited to the Auditor's account)would the Auditor not invite disqualification u/s 226(3)(d) forbeing indebted to the company for such sum ?>> CA Guru Prasad

TDS on Audit fee accounted for in more than one F Y

2009-03-02T22:01:00.000-08:00

Dear Sandeep,

Yours is a case where the payee owing to the method of accountingfollowed by him ends up spreading his income over a number of years.But the payer that follows the accrual basis of accounting has madethe TDS on the entire amount only on one occasion when it providedfor the expense. In such a situation a question indeed does arise:How would the payee claim credit for the TDS that's been deductedand deposited in one particular A Y relating to one particular F Y?Can the payee claim the amount of TDS on instalment basis, staggeredover a period of time, ending in the year in which he fully realizesthe amount of income?Let's see what the CBDT Circular No 5/2001 02.03.2001titled "Problems faced by assessees in getting due credit for taxdeducted at source under section 199" says in this regard. Thiscircular was issued to address the problem faced by the landlordswho were having a hard time linking up the TDS on rent with theirrental income. Section 194I requires TDS be made even on advancerent, and even on the amount of security deposit if it partakes ofthe character of rent. How were the landlords supposed to claim theTDS in such cases when they weren't going to account for thoseamounts as income in the year they received it?Although this circular was brought out to mitigate the payeescovered under Section 194I, I don't see any reason why we can'textend the same logic to cases involving other TDS sections also.In para 3 (i) the circular says:[Where advance rent is spread over more than one financial year andtax is deducted thereon, credit shall be allowed in the sameproportion in which such income is offered for taxation fordifferent assessment years based on the single Certificate furnishedfor tax so deducted on the entire advance rent.]This circular was referred to by the Tribunal in the case of PradeepKumar Dhir v. Asstt. CIT [2007] 107 ITD 118 (Chd.) (TM) I citedearlier. That case related to commission income, which is subjectedto TDS u/s 194H.Clearly, we have the law on our side on this one. TDS deducted on asingle occasion can be claimed by the payee-assessee on aproportionate basis if owing to his method of accounting being whatit is, he happens to account for that income over a 2-3 year period.Thanks,CA Sanjeev Bedi--- In http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=paA1w8XOmwznmmVlyE9c8poIVLJzcceguHQvKjClq7yZcBfr2gDCDH4caKy_CiYDOSL63nWZlyHQMfezZlrdA7Jsh7raCs-lHC4, SANDEEP GOEL wrote:>> *Sanjeev Bedi ji,> Your reply is to the point and well supported by relevant sectionand case> laws,> thanks for a truely professional answer.> I am claiming the TDS in my own return in the same way for last somany> years and getting refunds too. I used to give note of relevantsection at> the end of Computation sheet> but the same is now not possible as now no paper is enclosed withthe ITR.>> Now my question is that usually fees are received in next year of> provisioning but if the fees is received after 2 or 3 years , canwe still> claim it . e.g. provision is made in a pvt ltd co B.sheet for YE31.3.2006> for an amount of RS 27,500 and TDS deducted in previous year 2005-06 but> fees was recd in financial year 2007-08 partly Rs 17,500 andpartly in> financial year 2008-09 Rs 10,000> I accounted for my income on cash basis Rs 17,500 in FY 2007-08and Rs> 10,000 in 2008-09 **> what will be the position of claiming the TDS credit in such acase , TDS> certificate is one only ?> Can i claim in one finacial year or in 2 years and can i claim TDScredit> even after 2-3 years of deduction ?> **>> CA Sandeep Goel*

TDS on Audit fee

2009-03-02T21:59:00.000-08:00

Hi Pardeep Ji,

No issue at all here! You need to go through Section 199 of the I TAct.It's been held in numerous Tribunal cases that credit for TDS is tobe given in the year in which the assessee (the recipient of income)offers the income for taxation. Chartered accountants follow cashsystem of accounting. Their auditee companies on the other handfollow the mercantile system of accounting, which requires that theyprovide for accrued expenses on 31st March. Now the year mentionedon the TDS certificate, in case of TDS made on 31.03.2009, would beA Y 2009-10. But the payee would be accounting for that income onlyin the financial year 2009-10, the relevant A Y for which is 2010-11. So in the event, would he have any problem in claiming such TDSin his computation of income? No.But the FA 2008 has amended Section 199 to insert the following sub-section:[(3) The Board may, for the purposes of giving credit in respect oftax deducted or tax paid in terms of the provisions of this Chapter,make such rules as may be necessary, including the rules for thepurposes of giving credit to a person other than those referred toin sub-section (1) and sub-section (2) and also the assessment yearfor which such credit may be given]The power to make rules for the purposes of giving or denying creditfor TDS has been vested in the CBDT. I am not aware of any rulesbeing brought onto the statute book that have disturbed the statusquo. I think we shall still continue to be entitled to claim creditfor TDS in the year in which we offer the income for taxation. If Ifollow cash system of accounting, I shall claim, and be allowed bythe AO, the TDS deducted by my clients on 31st March 2009, in myreturn of income for the A Y 2010-11. TDS works on the matchingconcept: you get to claim an amount of TDS only in the year in whichyou submit for taxation the income upon which tax has been deductedat source.In Pradeep Kumar Dhir v. Asstt. CIT [2007] 107 ITD 118 (Chd.) (TM),the assessee, a commission agent received commission from variousprincipals and TDS was made by the payers on accrual basis as soonas they booked the commission expense. The commission agent since hefollowed cash system of accounting accounted for the income onlyafter he'd actually received it. The Tribunal held that the TDSclaim was admissible as and when the assessee offered for assessmentthe income subjected to TDS.The decision of the Mumbai Bench in the case of Toyo Engg. IndiaLtd. v. Joint CIT [2006] 5 SOT 616 (Mum.) is also an instructiveone. In this case also, it became difficult to establish a nexusbetween income and TDS, the assessee being engaged in providingtechnical services and recognizing his income only on the completionof a project. The Tribunal laid down the following rules:[The income or loss is the cumulative result of the working carriedon by the assessee and measured for each assessment year. Therecould be no immediate or direct nexus between the income chargeableto tax and the tax deducted out of the payments made.Tax deduction is basically a machinery provision for collecting taxon the potential income of the assessee. But there is no conclusivepresumption that tax is invariably deducted out of income. That iswhy the expression is `tax deducted at source' instead of `taxdeducted from income'It is not possible to correlate the amount of TDS with a specificamount of income earned by the assessee in a particular assessmentyear. When section 199 says that credit shall be given for the TDSon the production of TDS certificate for the assessment year forwhich such income is assessable, it is implied that the nexusbetween the TDS and the income would remain rather notional orconceptual only]Based on the above discussion, I think we should have any problem inclaiming TDS deducted by a company on 31st March 2009 even if weaccount for that income in the A Y 2010-11.Thanks,CA Sanjeev Bedi--- In http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=zD1uXsMdXKf_Nx1yyDnOihMzeSubeBb7NIE3D0-IdMyFJNXWT43cb--8aE2d2RpP-yOsT0Np_0z9G26DHucoFGidND2d05T4TIQ, pardeep gupta wrote:>> Dear Sanjeev Ji> I have joined the group very recently, and i have gone through urreply on various queries which are extremely helpful and logical.After reading ur views I m really a big fan of urs. I will be highlyobliged if u please help me in clarifying a issue related to TDS onAudit fee.> > As u know in every balancesheet a provision for audit fee is beingcreated on say as on 31st March of previous year. while we (CA) areissuing the fee bill in the year we conduct our audit and chargeservice tax (if applicable). Now if the company deducts TDS onprovision of audit fee (as is required by Sec. 194 J), how can we(CA) can claim benefit of that Tax deducted by the compnay duringprevious year while we would be able to show the same only duringnext financial year when we actually conduct the audit and raisedfee bill. now if the company does not deduct tax on provision madein books , we are liable to qualify our report. and if the companydeducts tax we are not able to claim the benefit of TDS.> Could u please suggest the remedy for this practical situation,since i think most of our member will be facing the same problem.> > CA Pradeep Gupta> Haridwar> 9897238017>

Unabsorbed Dep--C/fwd in event of Change in shareholding pattern

2009-03-02T21:58:00.001-08:00

Hi Ravi,

Here're point-wise replies to your queries:1) Yes, of course. Land being a non-depreciable and therefore a long-term capital asset will entail LTCG. The building being adepreciable asset will entail STCG. The WDV of Rs 40 lacs you'vementioned is obviously the depreciated value of building. The saleconsideration of Rs 1.25 crore must have been segregated into landand building by the buyer. The buyer too needs to determine thefigure of building separately in order to be able to claimdepreciation on it. Bifurcate the Sale consideration of Rs 1.25crore into the price for land and the price for building. Thencalculate the STCG and LTCG on the sale of building and landrespectively.You can't set off the brought forward business loss against yourincome under the head Capital gains by virtue of the provisions ofSection 72(1). However the unabsorbed depreciation can be utilizedto knock some portion of your capital gains figure off. We are ableto carry forward Depreciation if not fully absorbed in a particularyear till eternity. This is possible because in reality there's nosuch thing as "Brought forward depreciation". Depreciation nothaving been written off fully in a year owing to insufficiency ofprofits merges with the depreciation of the following year and soon. Depreciation never gets old or dies; it keeps reincarnatingitself.2) Regarding the eligibility to claim carry forward of unabsorbeddepreciation consequent to the change in the shareholding pattern ofthe company, no, you aren't correct. The word "loss" mentioned inSection 79 doesn't include unabsorbed depreciation. When wesay "loss" in the context of the taxation law, we mean the businessloss sans depreciation. Here's a case law:[The word `loss' mentioned in section 79 does notinclude `unabsorbed depreciation' or `unabsorbed developmentrebate'. Accordingly, the bar imposed under the main part of section79 is not attracted as far as `carry forward and set-off ofunabsorbed depreciation' or `unabsorbed development rebate' isconcerned - CIT v. Kalpaka Enterprises (P.) Ltd. [1986] 24 Taxman167/157 ITR 658 (Ker.).]The new management stands to lose the benefit of brought forwardbusiness losses only.Thanks,CA Sanjeev Bedi--- In http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=EiEkCAsBsw4Z69JEfuSizXAPb_P1OIohqb3qCp_c6LhDFvu-aTUQzdJaj8US9vzvc6SP_1mX2zyKOozO-DMautpwHtE-9-MD5tGa, selvaganapathyravichandran wrote:>> Dear Sanjeev,>> Warm GreetingsÂ to you,>> We need your advise on the following matter.> 1.One of our client a Pvt Ltd co, sold land & Building for 1.25Crores and Depreciated value of the Asset (Block ) is Rs. 40 Lakhs.> How to determine the capital gain, whether- Land & Building is tobe separately calculated. If so the gain arising from the sale ofassets can be set off against the C/f losses of about 90 lakhs(Business Loss & Depreciation Loss).>> 2, Suppose the shares of the company is sold to other partyentirely ,is the new management is allowed to get the benefit of C/fdepreciation Loss , since my view is that the new management cannotclaim C/f loss.>> We shall be highly thankful if you could clarify the above mattersat the earliest.>> Regards> Ravi

TDS on Fee to University in the UK

2009-03-02T21:56:00.000-08:00

Hi Anoop,

Does the University or the foreign institution the student isenrolled with have a permanent establishment or a liaison office orthe like in India? If not, then prima facie this is a case where theincome of that university won't be deemed to accrue or arise inIndia in terms of Section 9. Section 195 gets called in only afterwe're sure of an item of income of a non-resident being taxable inIndia.The bank is right in insisting on the certificate of the CA in termsof the RBI Circular No. 3 (A.P.) DIR Series 2007-08/100 dated 19thJuly 2007. The format of this certificate is prescribed in the CBDTcircular No 10/2002, dated 9-10-2002. You can issue this certificatestating that the payment being remitted isn't taxable in India. Ofcourse before doing that you'd have to make sure, in terms of theDTAA India has with the UK that the income of the Britishinstitution isn't liable to tax in India.Thanks,CA Sanjeev Bedi--- In http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=hCxbDwA3S_Rbip1Sn8SEPJ3wesq7ZnYw69hqDrMwCUwvSYDXhdboyPqlUY6rVhNbBuAH0kupEbI2XLlPMxpLFo3FDpEPcGifOGQU, Anoop Bhatia wrote:>> Respected Members>> I have faced one query and seeking your valuable opinion on thesame.>> A student pursuing professional degree from abroad is required topay 500> pound as fees to the foreign institution by way of DD. When thestudent> approached to the bank for dd, banker asked him to provide a CAletter> certifying that TDS has been applied on such fees being paid fromIndia.>> Prima facie the above situation appears to be covered by theprovisions of> Section 195 of the Income Tax Act, 1961 but how we can ensure thatTDS> compliance is required or not ? How we can expect a student toensure> deducting TDS on the fees paid by him to a foreign institution. Todo so he> needs to have PAN as well as TAN no. because without which TDS cannot be> ensured. Is there some practical way to tackle this situation. orthere> exists some CBDT clarification/circular on this issue.>> Kindly enlighten.>> Thanks & regards>> Anoop Bhatia> Jaipur>

Trust for benefit of Minor 2

2009-03-02T21:54:00.000-08:00

Hi Madhu,

Yes of course, why not? In the Deepak Family Trust case that Iquoted, a trust was said to be eligible to claim deduction u/s 80Lon account of being assessable in the capacity of an individual. 80Lcertainly has closer affinity with 80C than section 54. Once therevenue is ready to assess a trust as an Individual, how can it denyit the deduction u/s 80C? But I am not sure who will be the personsupon whose life we can take out an insurance policy and claim thepremium paid as deduction u/s 80C. Would it be the trusteesthemselves or the beneficiaries?Regarding fresh infusion of funds into the trust kitty, I don'tthink there should be any problem. As long as the child is minor,there can be no adverse tax consequences. If there wasn't a taxliability upon the initial introduction of funds into the corpus, notax event arises on a second helping as well. The income the trustearns keeps getting added to the trust's corpus. So the trust'scorpus isn't static anyway. The tax consequence would be only on thetrust itself—on the income it earns on the investment of those funds.Thanks,CA Sanjeev Bedi--- In http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=OlyijGXmIvjJERQM0UBw3JHAFB4BBmdTzcZ4QiMcv7bUZPKXWJw3cFQU5UADvWqnr8PhRbBp91Hsw_nOuQg-DUuXmtkypZt9wg, madhu tapuriah wrote:>> Res Sanjeev ji> good discussion in lucid manner.> Now i have to query on the matter>> when we say that We have had cases where the courts have ruledthat trusts, being>> individuals, are eligible to claim exemption from capital gains bymaking investments u/s 54, etc. CAN THE SAME RATIO BE APPLIED ANDTHUS CAN THE TRUST CAN CLAIM BENEFIT U/S 80C ???>> Second query is that once the family beneficiary trust is createdwhether the settler in the, say 3rd or 4th or subsequent years,againset aside any sum of money in the same trust as corpus withoutattracting any tax liability ??>> Regards> Professionally Yours> CA Madhu Soodan Tapuriah

Trust for benefit of Minor

2009-03-02T21:40:00.000-08:00

Hi Pravin and Anoop,

The trust is an Individual for the purposes of assessment under theIncome tax law. It is an established law now that "individual" asdefined in the tax law isn't restricted to human beings alone. Atrustee is a representative assessee of the trust in terms ofSection 160 of the Act. The trust being an artificial entity, therehas to be a definite person upon whom the liability to discharge thetax obligations of the trust can be affixed. What status does arepresentative assessee have? Since the trust has a number oftrustees, the revenue often argues in favour of treating them asAOP. But the courts have had a different take on this each time thismatter came up before them.In CIT v. Deepak Family Trust (No. 1) [1995] 211 ITR 575/[1994] 72Taxman 406 (Guj), the Gujarat HC said:[It is now well-settled that the word `individual' does notnecessarily and invariably always refer to a single natural person.A group of individuals may as well come in for treatment as anindividual under the tax laws if the context so requires. Theword `association' means `to join in any purpose' or `to join inaction'. Therefore, `association of persons' as used in section 2(31)(v) of the Income-tax Act, 1961, means an association in which twoor more persons join in a common purpose or common action. Theassociation must be one, the object of which is to produce income,profits or gains. In the case of a discretionary trust, neither thetrustees nor the beneficiaries can be considered as having cometogether with the common purpose of earning income. Thebeneficiaries have not set up the trust. The trustees derive theirauthority under the terms of the trust deed. They are merely inreceipt of income. The mere fact that the beneficiaries or thetrustees, being representative assessees, are more than one, cannotlead to the conclusion that they constitute an association ofpersons. The trustees of a discretionary trust have to be assessedin the status of `individual' and consequently, deduction undersection 80L of the Act, is allowable to them."]We have had cases where the courts have ruled that trusts, beingindividuals, are eligible to claim exemption from capital gains bymaking investments u/s 54, etc.And I don't think the fastening of liability to make TDS u/s 194C ona trust by means of a separate entry under clause (h) in sub-section1 (if trusts are individuals, wouldn't they be covered by clause (k)anyway?) takes away from our argument that trusts ARE individuals.It is just that a trust is a special kind of individual. All thesame, a trust would be entitled to be taxed on slab basis just likean individual assessee.And Anoop, please note that the M R Doshi judgement would hold goodonly so long as the amount of income keeps getting accumulated tillthe minor kid turns 18. In the event the trustees distribute theincome even whilst the child is still a minor, the trust would bejust a smoke screen and a façade. We can outsmart the revenue bycreating a trust as a Special Purpose Vehicle to hold the incometill the minor beneficiary becomes major. If the trustees aren'tgoing to wait till the beneficiary turns major and startdistributing the income right away, they'd simply be hoodwinking thelaw and making a mockery of Section 64(1A).Thanks,CA Sanjeev Bedi--- In http://finance.groups.yahoo.com/group/ICAI_CIRC_MEERUT_CA/post?postID=ZIbpXjQBulN4NjUCUo98eLgUMeA8dcJ_whUVrvVy9KcT9sLWTNS5Zu46keBxdMEYG_euFk8eFqM8ZfML3Gr-G2nrHVz0sHvBgQ, pravin saraswat wrote:>>>> Dear Sir,>> Please further supplement your reply with the tax rates applicableto> such trust and if it is going to be taxed in the highest slab, then> the quantum of tax benefit to be derived in the both situations> ie. Clubbed Income Vis-a-vis Private Trust Income.>> With high regards>> PRAVIN SARASWAT>> 9829063908>> To: banoop@...: ICAI_CIRC_MEERUT_CA@...: sanjeevbedi2001@...: Tue,3 Feb 2009 08:49:06 -0800Subject: {amresh's-CA's} Re: Query onPrivate Trust>>>>>>>>> Hi Anoop,>> This is quite a settled issue. I had answered a similar queryabout a year back. You may go through Message No 22767. The incomeof the trust set up for the benefit of the minor can never be taxedin the hands of the parent. The trust is an assessee in its ownright. Setting up a trust for the benefit of the minor is therecommended way to bypass the provisions of Section 64(1A).>> We have the judgement of CIT Vs M R Doshi [1995] 211 ITR 1 (SC) toconfirm the above view.>> And the fact that the grandfather has floated the trust wouldn'tmake a difference—the income of the trust will be always taxable inthe trust's hands, and never in the trustee's hands. In any case,even if the grandfather directly transfers a source of income to hisgrandchild, there can be no clubbing. Section 64(1A) doesn't applyto transactions between grandparents and grandchildren.>> Thanks,>> CA Sanjeev Bedi--- On Fri, 1/30/09, Anoop Bhatia wrote:> From: Anoop Bhatia Subject: Query on PrivateTrustTo: "Sanjeev Bedi" Date: Friday, January30, 2009, 11:32 AMRespected Sanjeev ji>> I wanted to know the treatment of taxation of income of a trustwhich is> created by a father for benfit of minor son. Does the income insuch cases> revert to the hand of parent or it will remain seperately taxablein the> hands of private trust only. The question assumes significane inthe wake> of usage of private as a tax planning tool, becuase if a parentdirectly> trasfers some source of income to the minor the income will revertfor> taxation in the hands of parent only (assuming that such parenthas higher> income to the other). So here in place of transferring the sourceto minor,> if it is transferred to a private trust would still clubbingprovisions of> section 64(1A) prevail.>> In above case if the trust is created by Grand Father for thebenefit of> minor Grand Son, the clubbing will be done in the hands of Father(i.e.> Parent) or it will remain taxable in the hands of trust only.>> Now my query is, if income in both the cases mentioned abovebecomes> taxable in the hands of parent and not in the hands of trust thenwhat is> the sense of creation such trust. Your valuable opinion on boththe matters> is solicited.>> I have raised this query in group forum but could not get a to-the-point> reply, hence seperately writing to you. May be while answeringthis query> you may mark a copy to gruop for the benefit of all.>> Warm regards>> Anoop Bhatia> Jaipur>>>>>>>>

FBT and disallowance u/s 40A(9)

2008-10-08T03:20:00.000-07:00

Hi Mr Devarajan,

Why do you need to pay FBT on contribution to a staff welfare fundat all? Since such an expense gets disallowed u/s 40A(9), the matteris settled there. The government can't both disallow an amount andexpect us to pay FBT on it as well. The idea behind FBT was to curbthe practice of perquisites enjoyed collectively by employees goinguntaxed in their hands owing to it being practically impossible toattribute an appropriate quantum of those benefits to the individualemployees. While the employer got to knock such expenses off hisincome. The government felt—-not entirely unjustifiably—-it wasgetting swindled out of its legitimate share of revenue—-since oneperson's expense is another person's income, if the former savestax, the latter ought to pay tax to even the scales. Since itwouldn't have been practical to attribute a collective expense likelabour welfare to individual employees and make them pay tax on it,the government made the employer cough up a fringe benefit tax at acertain percentage of the expenses incurred on the workforce.Since in your case we have a specific provision for the disallowanceof contribution to any unrecognized fund, the amount will bedisallowed and there would be no question of paying up the FBT onit.May be if you want to camouflage the nature of this expense in orderto claim it under the head labour welfare, then you'd have to paythe FBT on it.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, "Devarajan.V." wrote:>> Any contribution to staff benefit fund other than PF, Gratuityetc.> will not be allowed as business expenditure u/s 40A(9). In suchcase,> whether this should be taken under employee welfare for thepurpose of> calculating FBT?>> CA Devarajan.V>

TDS on freight paid on seller's behalf

2008-10-08T03:18:00.000-07:00

Hi Mr Sharvari,

I disagree with you. I didn't quite get what you meant by "the onuspasses on to the assessee". Section 194C opens with the words "anyperson RESPONSIBLE for paying any sum". Who in this case—payment tothe transporter made by the buyer on the seller's behalf and debitedto the latter's account—was the one responsible for paying freightto the transporter? The supplier of goods, it seems. Normally it'sthe customer who shells out the freight as the custom of "To-pay" GRis in vogue at most places. But in this case, the goods seem to havebeen supplied on an FOR basis; but the supplier didn't pay up thetransporter when the truck left the destination. Transporters areoften paid only part of the freight when they set sail. The customerupon proper delivery of the goods settles the freight bill anddebits the seller's account, as mutually agreed upon.In such a case, since the customer merely acts as the agent of theseller, it's the seller who'd be responsible for making the TDS.What the customer should do is withhold the tax payment out of thefreight payable and transfer the entry to the supplier. The supplierwould deposit the TDS and comply with the law.As long as it isn't a "To-pay" GR, I don't think the customer can becalled upon to deduct TDS. Section 40a, which disallows the expensefor non-deduction of TDS, targets the assessee who books the expenseand not the one who pays it on someone else's behalf and debits totheir account. Since there's no question of disallowance of thefreight amount in the customer's hands and it's the seller whose taxauditor would report this non-deduction of TDS on the amount offreight claimed as expense, it's logical to conclude that thecustomer can not be made liable for the consequences that ensue uponnon-deduction of TDS.And Mr Jain, disallowance would be applicable only for expenses onwhich TDS was DEDUCTIBLE. If an erroneously-deducted TDS isdeposited late, I don't think there can be any disallowance, basedon the language deployed in section 40a(ia). But once deducted,you're holding the tax amount in a fiduciary capacity as the trusteeof the government. So in case you don't turn it over to thegovernment within time or don't file the TDS return, issue TDScertificate, etc you'd be liable to the penal consequences.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, sharvari.murkute@...wrote:>> Dear Mr Jain>> Yes TDS needs to be deducted because the onus passes on to theassessee.> When the supplier reimburses the amount, it is assumed that allthe> applicable laws has been adhered to.>> I think the 40(a) disallowance should not apply as first of allthe> aforesaid courier expense has not been claimed as an expense inthe first> place for it to be disallowed.>> Dear All>> I have joined this group very recently and i must say that thediscussion> is quite lively>>>>>>>> "R D JAIN" > Sent by: ICAI_CIRC_MEERUT_CA@yahoogroups.com> Oct 03 2008 05:05 PM> Please respond to> ICAI_CIRC_MEERUT_CA@yahoogroups.com>>> To> ICAI_CIRC_MEERUT_CA@yahoogroups.com> cc>> Subject> {amresh's-CA's} TDS on expenses>>>>>> Dear All,>> If an assessee pays tansport Charges on behalf of supplier anddebit> it to suppliers a/c. in books, whether TDS need to be duductedU/s.> 194C on such paymnets.> Also if TDS is not applicable and the same has been duducted butpaid> paid late to the Govt.(in june 08), whether 40a disallowance is> attracted.>> Thanks> R D Jain>

Is interest u/s 234 B/C applicable?

2008-10-08T03:15:00.000-07:00

Hi Ramji,

Advance tax Funda is simple. The governing section of advance tax—Section 208—says in EVERY case where the tax liability is upwards ofRs 4999, you've got to fill out ITNS 280. Of course you can takecredit to the extent the others have filled out ITNS 281 to depositthe TDS made on income credited into your account.No matter how many firms the assessee was partner in and how manybusinesses he was drawing income from closed down during the year,if the tax payable by him on the income earned during the yearexceeds Rs 5000, he's got to have paid that tax during the course ofthe financial year itself. Advance tax provisions are based on thepay-as-you-earn scheme—the government needs money; you can't keepthem waiting till you've finalized your accounts and ascertainedyour exact income. Section 234B and 234C seek to penalize assesseeswho've shied away from paying as they earned.We are unnecessarily obfuscating the issue by introducing theconcept of "old" and "new" businesses here. The assessee hasremained the same throughout the year, hasn't he?! He was always inthe know of what was going on—the firm dissolving, the turnoverpeaking towards the fag-end of the year. Only the partnership firmcan take credit for the advance tax paid in Sept and Dec 2007. Hissituation is understandable--he wouldn't have deposited the advancetax in Sept and Dec 2007 if he had had a prognosis that the firmwould breathe its last post 15 Dec 2007. But then doesn't thatdissolved firm stand to claim a refund along with interest u/s 244Aon account of the excess advance tax paid during the year? Iunderstand your client may not have had anything to do with thatfirm any more and it'd be little comfort for him to know about this.What about the ITR of the firm? Was a refund claim lodged? Wouldyour client be entitled to a share in it when it is finallyreceived?The other argument of your client about the turnover having soaredtowards the end of the year isn't sustainable for a nanosecond. Icopy-paste below the proviso to Section 211(1):[Provided that any amount paid by way of advance tax on or beforethe 31st day of March shall also be treated as advance tax paidduring the financial year ending on that day for all the purposes ofthis Act.]So even if the turnover shot thorough the roof in the last fortnightof the year, he had till the evening of 31st March 2008 to haveknown about it. The previous instalments can't be a day later than15 Sept/Dec. Since the year is drawing to a close when the due datefor depositing the last instalment of advance tax approaches, thegovernment has very wisely granted a grace period of 15 days indepositing the last instalment of advance tax. Tax deposited till31st March will be deemed to have been deposited on or before 15thMarch itself. This is aimed at giving the assessees a chance to havea more accurate measure of their income so that the advance tax isthe closest approximation of the final assessed tax, and theassessees are spared the hardships of Section 234B and C. Theproviso to Section 234C too recognizing the windfall nature of thecapital gains and lottery winnings allows the assessee time till31st March of the year to deposit advance tax.So the sudden rise in turnover argument to save 234B/C interest goesout the window.The CBDT does have the powers u/s 119(2)(a) to waive interest u/s234A/B/C. To be sure the CBDT has come out withcirculars/notifications (Notif. F. No. 400/234/95-IT(B), dated 23-5-1996 and Circular No 783, dated November 18, 1999) laying down thecircumstances that warrant the waiver of penal interest underadvance tax provisions. But the CBDT empowers the ChiefCommissioners to waive interest in cases like where the books havebeen seized in a search operation and the assessee isn't in aposition to prepare his accounts; receipts hitherto thought to beexempt have become taxable consequent to a SC judgement or anamendment in the law, etc.Based on the facts narrated by you, your client doesn't have asnowball's chance in hell to get the interest u/s 234B and C waived.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, "Ramji" wrote:>> I have an unusual issue.>> An individual client of mine, has started a new business from Dec> 2007. He was earlier a partner in a firm and the firm dissolved ason> Dec 2007. He continues to do the same business in his individualname> and has got all the required registrations.>> Now when we were computing his income for filing, he fell short ofthe> tax payment and had to make a large self assessment payment ofincome tax.>> The question is>> Will interest u/s 234 be applicable?>> My arguement to him is that it is his business to estimate hisincome> and pay the advance taxes accordingly. So he is liable for interest> u/s 234.>> His arguement is he was not aware that the firm would split andhence> had paid advance taxes for Sep and Dec on the old basis. However,the> turnover has also peaked in the end of March 2008 and so he wasalso> not aware that this turnover would come, when he paid his advancetax> in March 2008. He says that due to this, he is not liable tointerest> and is willing to now fight it out with the IT department?>> What are the views of my friends in this forum? Is 234 interest> applicable? If so, why? If not, also give reasons, to buttress my> client's case.>> Ramji>

More on Interest u/s 234C

2008-10-08T02:45:00.000-07:00

More on Interest u/s 234C
Tuesday, October 7, 2008

Hi Mr Devarajan,

You are right. I shouldn't have worded it the way I did. It came out sounding like I believed there could be a respite from Section 234C interest if the assessee deposited the advance tax by 31st March. The assessee stands to gain in terms of saving of penal interest under Sections 234A and B only if he deposits tax till the last day of the year. Ramji, I have come across a Rajasthan HC judgement that ruled that interest u/s 234C won't be attracted if the assessee hasn't at all deposited any advance tax during the year. Although this judgement won't come to your client's rescue since he did deposit some advance tax during the year. Just for the sake of sharing, I am discussing it below.Section 234B talks of "defaults" in payment of advance tax; section 234C talks of "deferment" of advance tax. The legislature clearly seems to have looked at the two terms differently in the sense that you can't have deferred your responsibility to deposit advance tax if you had defaulted in it. In other words, both these contraventions can't be made simultaneously. Default occurs when you fail to do something that you should've done. You fail to deposit advance tax or the amount deposited by you isn't adequate (90 per cent), then you're liable to penal interest. But "deferment" it seems presupposes the presence of some amount of advance tax instalment being there in the first place. When we have got no instalments of advance tax to begin with, where's the question of shortfall? Section 234C does say like "where the assessee who is liable to pay advance tax HAS FAILED TO PAY SUCH TAX, or […….] and then it goes on to state how in the absence of prescribed percentage of advance tax instalments being deposited on the 15th of Sept, Dec and March, the assessee would be liable to the penal interest. So the text of Section 234C doesn't seem to lend itself open to the interpretation that this section won't be applicable in a situation where the assessee has deposited Zero advance tax. But if we omit the words following the coordinating conjunction "Or", and connect the text appearing after the word "then" in there, this is how it reads:[Where the assessee who is liable to pay advance tax under section 208 has failed to pay such tax, then […] the assessee shall be liable to pay simple interest at the rate of one per cent per month for a period of three months on the amount of the shortfall from thirty per cent or, as the case may be, sixty per cent of the tax due on the returned income;]Arithmetically speaking it is still possible to argue that Zero also constitutes an amount; and we can calculate the shortfall by reducing zero from 30/60/100 per cent of the tax and charge interest thereon. But linguistically speaking, I think the department is on a sticky wicket in insisting on charging interest u/s 234C where the asseesee hasn't deposited a single penny of advance tax during the year. If I attempted a high jump of 10 feet but managed only 6 feet, then you can say I "fell short" by 4 feet. But if I didn't even try the jump, can you say that I "fell short" by 10 feet?!! In the absence of any available figure of advance tax, we've got nothing to measure the figures of 30/60/100 per cent against. So I don't think advancing (no pun!) the argument that Section 234C isn't applicable in a case where the advance tax is Zero is totally unsustainable— it does hold water, may be a few droplets.The Rajasthan HC judgement that said interest u/s 234C wasn't called for in the event of there being no advance tax before 31st March is CIT v. Smt. Premlata Jalani [2003] 264 ITR 744.Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Devarajan.V" wrote:>> Dear Sanjeevji,> > You have mentioned that, "Since the year is drawing to a close when the due> date > for depositing the last instalment of advance tax approaches, the > Government has very wisely granted a grace period of 15 days in > depositing the last instalment of advance tax. Tax deposited till > 31st March will be deemed to have been deposited on or before 15th > March itself. "> > This portion is not clear to me. Where is this deeming provision for 234C?> In fact the Department is collecting 1% interest for one month for the> shortfall arrived at after the remittance of 15th March. Deeming provision> may only help for interest U/S 234A and B. Please clarify.> > CA Devarajan.V> >> Hi Ramji,> > Advance tax Funda is simple. The governing section of advance tax—> Section 208—says in EVERY case where the tax liability is upwards of > Rs 4999, you've got to fill out ITNS 280. Of course you can take > credit to the extent the others have filled out ITNS 281 to deposit > the TDS made on income credited into your account. > > No matter how many firms the assessee was partner in and how many > businesses he was drawing income from closed down during the year, > if the tax payable by him on the income earned during the year > exceeds Rs 5000, he's got to have paid that tax during the course of > the financial year itself. Advance tax provisions are based on the > pay-as-you-earn scheme—the government needs money; you can't keep > them waiting till you've finalized your accounts and ascertained > your exact income. Section 234B and 234C seek to penalize assessees > who've shied away from paying as they earned. > > We are unnecessarily obfuscating the issue by introducing the > concept of "old" and "new" businesses here. The assessee has > remained the same throughout the year, hasn't he?! He was always in > the know of what was going on—the firm dissolving, the turnover > peaking towards the fag-end of the year. Only the partnership firm > can take credit for the advance tax paid in Sept and Dec 2007. His > situation is understandable- -he wouldn't have deposited the advance > tax in Sept and Dec 2007 if he had had a prognosis that the firm > would breathe its last post 15 Dec 2007. But then doesn't that > dissolved firm stand to claim a refund along with interest u/s 244A > on account of the excess advance tax paid during the year? I > understand your client may not have had anything to do with that > firm any more and it'd be little comfort for him to know about this. > What about the ITR of the firm? Was a refund claim lodged? Would > your client be entitled to a share in it when it is finally > received? > > The other argument of your client about the turnover having soared > towards the end of the year isn't sustainable for a nanosecond. I > copy-paste below the proviso to Section 211(1):> > [Provided that any amount paid by way of advance tax on or before > the 31st day of March shall also be treated as advance tax paid > during the financial year ending on that day for all the purposes of > this Act.]> > So even if the turnover shot thorough the roof in the last fortnight > of the year, he had till the evening of 31st March 2008 to have > known about it. The previous instalments can't be a day later than > 15 Sept/Dec. Since the year is drawing to a close when the due date > for depositing the last instalment of advance tax approaches, the > government has very wisely granted a grace period of 15 days in > depositing the last instalment of advance tax. Tax deposited till > 31st March will be deemed to have been deposited on or before 15th > March itself. This is aimed at giving the assessees a chance to have > a more accurate measure of their income so that the advance tax is > the closest approximation of the final assessed tax, and the > assessees are spared the hardships of Section 234B and C. The > proviso to Section 234C too recognizing the windfall nature of the > capital gains and lottery winnings allows the assessee time till > 31st March of the year to deposit advance tax. > > So the sudden rise in turnover argument to save 234B/C interest goes > out the window.> > The CBDT does have the powers u/s 119(2)(a) to waive interest u/s > 234A/B/C. To be sure the CBDT has come out with > circulars/notificat ions (Notif. F. No. 400/234/95-IT( B), dated 23-5-> 1996 and Circular No 783, dated November 18, 1999) laying down the > circumstances that warrant the waiver of penal interest under > advance tax provisions. But the CBDT empowers the Chief > Commissioners to waive interest in cases like where the books have > been seized in a search operation and the assessee isn't in a > position to prepare his accounts; receipts hitherto thought to be > exempt have become taxable consequent to a SC judgement or an > amendment in the law, etc. > > Based on the facts narrated by you, your client doesn't have a > snowball's chance in hell to get the interest u/s 234B and C waived.> > Thanks,> > CA Sanjeev Bedi> > --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Ramji" > wrote:> >> > I have an unusual issue.> > > > An individual client of mine, has started a new business from Dec> > 2007. He was earlier a partner in a firm and the firm dissolved as > on> > Dec 2007. He continues to do the same business in his individual > name> > and has got all the required registrations.> > > > Now when we were computing his income for filing, he fell short of > the> > tax payment and had to make a large self assessment payment of > income tax.> > > > The question is> > > > Will interest u/s 234 be applicable?> > > > My arguement to him is that it is his business to estimate his > income> > and pay the advance taxes accordingly. So he is liable for interest> > u/s 234.> > > > His arguement is he was not aware that the firm would split and > hence> > had paid advance taxes for Sep and Dec on the old basis. However, > the> > turnover has also peaked in the end of March 2008 and so he was > also> > not aware that this turnover would come, when he paid his advance > tax> > in March 2008. He says that due to this, he is not liable to > interest> > and is willing to now fight it out with the IT department?> > > > What are the views of my friends in this forum? Is 234 interest> > applicable? If so, why? If not, also give reasons, to buttress my> > client's case.> > > > Ramji> >

Claiming STT rebate against MAT

2008-09-23T20:38:00.000-07:00

Hi Mr Gala,

I don't see any reason why STT can't be claimed against MAT profits. Section 88E lays down the pre-requisite that to be eligible to claim rebate on account of Securities Transaction Tax, the assessee must have income under the head "Profits and gains of business and profession". Now Chapter XII-B of the Act, which contains Section 115JB that levies MAT, is titled "Special provisions relating to certain companies". Section 115JB requires companies to shell out a minimum of 10 per cent of their book profits towards income tax. If the tax by regular computation doesn't work out to that amount, an amount equal to 10% of the book profits of the company acts as the company's surrogate Total Income. This method bypasses the normal method of computation of total income whereby we determine the income under each head and then aggregate them to arrive at the figure of total income. Just because Section 115JB creates a fictional total income, it shouldn't mean we lose the right to examine the individual components of that income. Section 115JB doesn't lay down any new definition of the term "total income". It merely provides for an alternative method of finding out the total income in certain situations. So going by the usual definition of total income, we can still argue that the total income even if it is determined in an ad hoc fashion u/s 115JB continues to have its components—like the business income, house property income, capital gains and so on. Since the company had had business profits, it would be eligible to claim STT rebate u/s 88E irrespective of the fact that it's had to arrive at its total income in the manner it was required to under Section 115JB. I think you can assign weights based on the composition of your regular total income to the total income computed u/s 115JB to determine the percentage share of the business income from securities transactions therein. But then where's the need to do it? You already have the average rate of tax in MAT—10 per cent. Just apply this rate to the income from the STT transactionsThanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "galavilas" wrote:>> Hello,> Can anybody advice me if We can claim STT rebate against tax payable> under section 115JB(MAT).An early reply will be highly appreciated.> > Vilas M. Gala

Receipt of Share Application money in Cash and Section 269SS

2008-09-23T03:14:00.000-07:00

Hi SanJosh, Deepakji and everyone,

Here's my take on this:Section 269SS came to grace the statute book on 30th June 1984. To get under the skin of a provision we must first understand what was the mischief that was sought to be curbed by the introduction of that provision. So let's see how CBDT Circular No 387 dated 6th July 1984 tried to explain the rationale behind the insertion of Section 269SS:[Unaccounted cash found in the course of searches carried out by the Income-tax Department is often explained by taxpayers as representing loans taken from or deposits made by various persons. Unaccounted income is also brought into the books of account in the form of such loans and deposits and taxpayers are also able to get confirmatory letters from such persons in support of their explanation.With a view to countering this device, which enables taxpayers to explain away unaccounted cash or unaccounted deposits, the Finance Act has inserted a new section 269SS in the Income-tax Act debarring persons from taking or accepting, after 30th June, 1984, from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of such loan or deposit or the aggregate amount of such loan and deposit is Rs. 10,000 or more. This prohibition will also apply in cases where on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), and the amount or the aggregate amount remaining unpaid is Rs. 10,000 or more. The prohibition will also apply in cases where the amount of such loan or deposit, together with the aggregate amount remaining unpaid on the date on which such loan or deposit is proposed to be taken, is Rs. 10,000 or more.]The present-day threshold of loan/deposit, crossing which you may fall foul of Section 269SS, stands at Rs 20000 of course. So that was the mischief: Unscrupulous assessees explaining away excess cash found in their possession as loans/ deposits accepted from relatives/friends. As there was no way to trace the movement of cash, the authorities could only allege some hanky-panky on the part of the assessee; they could never prove it. So it was thought how about making it mandatory to accept loans/deposits of Rs 20k or more by way of account payee cheques/bank drafts only. The bank statement will constitute a reliable evidence of the loans actually having come to appear in the assessee's books by bona fide entries only and not having been arranged posthumously after a situation where an assessee having to explain the cash in his possession had arisen. I don't have any quarrel with Section 269SS as such, although I am vehemently opposed to its reciprocal Section 40A(3), which debars payments exceeding Rs 20k (Mind you Section 40A(3) applies to payments of Rs 20001 and above, but Section 269SS applies to receipts of more than Rs 19999. I know at least one case where an assessee landed in huge trouble for not having made this distinction! ). So section 269SS I think is a perfectly legitimate provision meant to protect the interests of the revenue. I feel to decide how far and wide the meaning of the word "deposit" as envisaged in Section 269SS would cast its net, we should do an honest introspection without being prejudiced in the assessee's favour. Considering the huge scope of tax evasion in the absence of Section 269SS being there on the Act, I would rather be tilted towards the revenue's side on this one. If we contend that share application money isn't covered u/s 269SS on account of it neither being a deposit nor being a loan, couldn't this open the floodgates especially for private companies—which we know are nothing but glorified family enterprises—to just brush away unaccounted cash as the amount received towards application money for allotment of shares and then go on to allot shares (to shareholders and their relatives)? But wait a minute! There's another legislation known as the Companies Act, 1956. If we look at the provisions of that Act, it seems there are ample safeguards to make sure the directors of even private companies can not use the media of share application money as a peg to hang their ill-gotten wealth on. Section 69(4) of the Cos Act requires all application monies received from potential shareholders to be kept deposited in a scheduled bank and to remain there till the time the shares are allotted. There's a requirement under the Cos Act to put a kind of lock on the share application money till the entire amount payable on application of shares is received. So there doesn't seem to be any way an assessee-company found in possession of unaccounted for cash could get off the hook by asserting that the excess cash was on account of share application money it had received towards allotment of shares it was planning. The share application money would be lying stashed away in a scheduled bank and not in the company's cash till. Also, here is an extract from section 69(4) of the Cos Act:[…..and the sum payable on application for the amount so stated has been paid to and received by the company, whether in CASH or by a cheque or other instrument which has been paid.]So as far as the Cos Act is concerned, there certainly is no bar on the company accepting share application money in cash initially.The Jharkhand HC in Bhalotia Engg (P) Ltd's case doesn't at all seem to have given thought to these points. All it bothered about in its entire judgement was whether share application money partook of the character of a Deposit. I too believe share application money to be purely deposit until the shares get allotted, but that isn't the end of the matter. To decide whether section 269SS gets attracted or not in this case, one needs to look much further. If whether or not an amount of Rs 20K or more constitutes deposit was all it took to impose penalty u/s 271D, all those accepting cash advances towards sale of buildings, machineries, etc and later returning those consequent to a transaction not having come through would be held guilty of contravening Section 269SS. So in my view the Jharkhand HC didn't take the totality of the circumstances surrounding a transaction involving share application money into view in delivering this judgement. A penalty u/s 271D wasn't called for, in my arrogant opinion. A Caveat: Receipt of share application money in cash had better be avoided. Accept only crossed cheques and the like. Thanks,CA Sanjeev Bedi--- In http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com, "Sanjeev Josh" wrote:>> > Dear Deepak Ji,> > Thanks a ton for pointing out the disturbing decision in case of> Bhalotia Eng. Works handed out by the Hon'ble JHARKHAND High Court.> > I have no hesitation in admitting that this decision had not been> noticed by me. I would love to go into the depth of the issue now.> > Thank you for pointing it out. That's the beauty of this group! Thanks> Amresh Ji for being there!> > Tax is a ocean. The expert a little individual on a paddle boat! The> distance he travels depends on the strength of his/her leg muscles! The> depth to which he/she could dive depends upon the capacity and the> ability of the lungs to hold air. The correct direction he/she travles> depends on the little compass he/she has with him/her in the form of> books, case-laws etc AND the friends like you who guide him/her as a> NORTH STAR!> > Thanks Deepak for twinkeling like the NORTH STAR! making me a poet !>> > Deepak I have a request: You attached an attachment to your message. I> have not been able to access it. Could you please send it to me at my> email worldsbestca@ ... ?> > I would love to investigate the Hon'ble JHARKHAND High Court.> > I would love to see how how the principle of "Purposive interpretation"> have been applied by the said Hon'ble High Court.> > s far as my knowledge goes "Purposive interpretation" rule is to some> extent an extension of the literal rule and under it the words of a> statute will as far as possible be construed according to their> ordinary, plain, and natural meaning, unless this leads to an absurd> result. It is used by the courts where a statutory provision is capable> of more than one literal meaning and leads the judge to select the one> which avoids absurdity, or where a study of the statute as a whole> reveals that the conclusion reached by applying the literal rule is> contrary to the intention of Parliament.> > Thanks again.> > Sanjeev Josh FCA IRS> >> > Dear Friends> > With due respect to everybody I wd like to point out a disturbing> decision in case of Bhalotia Eng. Works handed out by the JHARKHAND HC.> which is disturbing & has been commented upon as wrong one by many> experts, but still the discussion on the same is worth noting. Pl find> enclosed herewith in a separate file the material I have on the subject.> The same has previously been published in various magazines of TAXMAN.> > Â> > CA DEEPAK GADGIL> > SOLAPUR, MAHARASHTRA> >> > --- On Mon, 22/9/08, Sanjeev Josh worldsbestca@ wrote:> >> >> > Dear Sandeep,> > I would tend to cast my vote with you!> > Your answer is more likely than not the correct one.> > Cross the fingers!> > Sanjeev Josh FCA> >> > --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "sandeep agrawal"> wrote:> > >> > > Dear Sir,> > >> > > Share Application money is neither Loan nor deposit so in my view> 269ss not> > > applicble in this case.> > >> > >> > > Regrads> > >> > > Sandeep Agrawal> > >> > >> > > On 9/20/08, manish saraogi man_saraogi@ ... wrote:> > > >> > > > Section 269SS covers acceptance of both loans as well as deposits> and> > > > if the aggregate amount is in excess of Rs. 20000/-, then there is> a> > > > voilation.> > > >> > > > Acceptance of Share application in cash will fall within the> purview of> > > > Section 269 SS.

Disallowance of Expenses due to non-deduction of TDS--Section 10B case

2008-08-31T21:08:00.000-07:00

Hi Mr Kalra,

I don't think you need to add back the amount of expenses on which TDS though ought to have been deducted hasn't been deducted. Section 40 says "the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession". And Section 10B forms part of Chapter III, which chapter is titled "Incomes which do not form part of total income". But Section 10B speaks not of "exemption" but of "deduction". The Chapter heading carries more weight than the section itself. So I feel since income eligible for Section 10B exemption never forms part of our total income and therefore we never undertake the exercise of "computing the income chargeable under the head B/P", there's no question of disallowance u/s 40a(ia) in case TDS hasn't been made on the specified expenses.Other consequences of non-deduction of TDS will follow, of course.Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "verendra Kalra" wrote:>> > > Dear Members, > > The income of an enterprise is exempt u/s 10B. Pl. advise what will be the> impact on the exempt profits, in respect of any disallowance due to failure> to deduct TDS on expense payments made to earn the export income of that> enterprise?> > > > Verendra Kalra> Nangia and Company> Chartered Accountants> 75/7, Rajpur Road,> Dehradun -248001 (India)> O +91-135- 2747084,2743283> F +91-135- 2740186> E-mail: verendra.kalra@ ... > W-Site: www.nangia.com Please note change

TAX AUDIT OF CO-OPERATIVE SOCIETY

2008-08-15T01:41:00.000-07:00

Dear Mr Agrawal,

Yes of course the co-operative society engaged in the business oflending money to its constituents would be required to get itsaccounts audited u/s 44AB if the interest receipts exceed Rs 40lacs. The fact that the whole of the profits of the co-op might bedeductible u/s 80P does not bear upon the applicability of Section44AB. Section 80P admits of the deduction from "profits and gains ofbusiness". Interest income being business receipts in the co-op'shands, it'd be called upon to appoint a CA u/s 44AB.I also reproduce the relevant para below from the ICAI's guidancenote on tax audit:[A co-operative society carrying on business may enjoy exemptionunder section 80P. Such institutions/associations of persons willhave to get their accounts audited and to furnish such audit reportfor purposes of section 44AB if their turnover in business exceedsRs. 40 lakhs]Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_CA@yahoogroups.com, "Anil Kumar Agrawal" wrote:>> Dear friends,Will any body let me know whether a co-operativesociety of bank engaged in the activity of financing to its membersand getting the interest ` require to get its a/c audited u/s 44AB.The objective of the society is not to make profit although it hasearned some profit.CA Anil Agrawal

TDS on Payments to Foreigner--Commission and Content-writing on the web

2008-08-10T09:42:00.000-07:00

Hello Amreshji and Mr Parmar,

There is no doubt that no TDS is deductible in case commission is paid to a foreigner for soliciting orders abroad. This is despite the Explanation to Section 9(2) added by the Finance Act 2007. I'd discussed this issue very thoroughly some time back. Please look up my Message No 13373 dated May 14, 2007. About the fee paid to the American for writing content for an Indian website—what we need to see is: Does payment for writing made to a writer abroad constitute fee for technical services as defined in Explanation 2 below Section 9(1)(vii)? Writing something worth putting up on a site definitely involves skill. There's a technique behind it. Besides Amreshji you said the American would be appointed as the Site Club "Manager". Here's how "fee for technical services" is defined in the Explanation 2:[Explanation [2].—For the purposes of this clause, "fees for technical services" means any consideration […] for the rendering of any MANAGERIAL, technical or consultancy services…[…..[ .A site club manager would certainly be doing much more than banging away at the keyboard. The Explanation added by FA 2007 dispenses with the requirement of the non-resident having a place of business or business connection in India for his income to be subjected to tax in India. So it's difficult, based on a reading of Section 9, to argue that the revenues shared with the American manager of an Indian website won't be subjected to tax in India. But no final conclusion in respect of taxability of a non-resident in India can be drawn until we have referred to the relevant DTAA—in this case the DTAA with the USA. I quote below Article 15 of the Indo-US DTAA because the kind of services in question I think would be in the nature of "Independent Personal Services":[ARTICLE 15 - Independent personal services - 1. Income derived by a person who is an individual or firm of individuals (other than a company) who is a resident of a Contracting State from the performance in the other Contracting State of professional services or other independent activities of a similar character shall be taxable only in the first-mentioned State except in the following circumstances when such income may also be taxed in the other Contracting State :(a) if such person has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other State; or(b)if the person's stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 90 days in the relevant taxable year.2. The term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. ]Here the Contracting state means the US and the other contracting state, India. So independent personal services rendered by a resident of the United States would be taxable in the US only, unless the American has spent some time in India in connection with the work, which in the present situation isn't the case. Alternatively, if we take the case of someone in India being appointed to write content for an American website, would his income received in dollars abroad would be taxable in India? Yes very much. So based on this logic, an American writing from abroad for an Indian website can't be brought to tax in India. The new Explanation to Section 9 does not seem to have taken online services rendered across the internet into account. Unless such services are specifically charged to tax in India by suitable and explicit amendments in the Income Tax Act and the DTAA tells us in unambiguous terms the situs of taxation of such incomes, we can safely conclude that payment to a foreigner for services rendered abroad won't be taxable in India. More than the income tax, what you'd need to worry about is the Service Tax by reverse charge. There's no Rs 10 lac-exemption in such cases!Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "CA. PRAMOD PARMAR" wrote:>> Dear Memebrs,> > A firm paid commission to a foreigner in foreign currency for getting client> in US> > The foreigner has no office/agent in India> > Whether tds is deductible> > If yes than at what rate.> > Regards,> CA P R Parmar>Hi,I also add here a similar query .A company is running a on line site and now want to engage a person as Site Club manager in US and shall share the new revenue with the individual staying at US who of course is an American. He will be contemporary writer and shall write for the site. Whether tds is deductible u/s 195? If yes, at what rate? How to file TDS returns as the receiver is not having PAN?CA AMRESH VASHISHT

: Lineal Ascendant/Descendant and Manu Bhajji

2008-08-09T07:13:00.000-07:00

Dearest Balu,

For your kind information, I have read Manusmriti, though surely not as thoroughly as I have read the Income Tax Act! I am no pseudo-liberal who takes a sadistic delight in denigrating my own culture after having read a couple of Angrezi books. Swami Vivekananda said that Hinduism isn't afraid of the Truth. The greatest thing about Hinduism is its inbuilt self-correction mechanism. So whilst we had the system of Sati—women being set alight on the funeral pyres of their dead husbands; we also had people like Raja Ram Mohan Roy who rose in protest and had it banished. What distinguishes Hinduism from the Semitic religions is that the Hindus do not treat their scriptures as Words of God, unlike the followers of Semitic religions. Manusmriti, many people believe, says nasty things about women and Shudras. May be we can argue those aren't original verses, but later interpolations. I am no scholar of Sanskrit and have no means of knowing whether the English texts faithfully render what Manu wanted to say originally. But from what I have read from writings of eminent and unbiased authors—and not what Arun Shourie describes as "eminent historians" mind you--it's difficult to believe Manu had a high regard for women.And yes I said "Manu-like" to convey a sexist attitude. This I did despite having known that Friedrich Nietzsche, probably the greatest German philosopher and one of Osho Rajneesh's all-time favourites, had this to say about the Manusmriti:"Close the Bible and open the Manu Smriti. It has an affirmation of life, a triumphing agreeable sensation in life and that to draw up a lawbook such as Manu means to permit oneself to get the upper hand, to become perfection, to be ambitious of the highest art of living".And I don't think I contradicted myself by quoting from the HMA the definition of Sapinda. Hinduism is much bigger than Manusmriti. While we have had a history of oppression of women and other people, we have been able to move on, because we didn't believe our scriptures had any divine sanction. Let's not strip our great heritage of its greatest strength—self-criticism and self-correction. Namaskara,CA Sanjeev Bedi--- In http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com, "balunand" wrote:>> Dear Sanjeevji,> > I am a little surprised and disappointed that you too find it > fashionable to indulge in Manu bashing, a normal practice that I > have found among people who have never bothered to read what he has > written. Nowhere does Manu say that mother is not part of the > ancestry. Whether in inheritence or offering funeral oblations the > three generations from both father and mother's side are always > considered. In fact you contradict yourself in your last para when > you quote the definition of sapindaship as per HMA. Are you under > the impression that the 500 odd politicians sitting in our > parliament suddenly came up with that definition in 1956??. In > reality it is nothing but an english version of Shastric law. > > > --- In http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com, "Sanjeev Bedi" > wrote:> >> > Hi Priyank,> > > > Lineal ascendant/descendan t refers to people who form a vertical, > > unbroken line in their relationship. An ascendant is usually more > > remote than a grandfather. It seems the draftsmen decided to use > the > > words "lineal ascendant/descendan t" instead of saying Father, > > Grandfather, Great grandfather and so on. In terms of Section 56, > > this line can be extended to any degree. Since Ascent refers to a > > thing going skywards, and Descent means heading down south, it is > > clear that people related to you horizontally viz your cousins > > aren't your relatives for the purposes of Section 56 at least. > > > > Probably there has been a case or two where it's been held that > > lineal ascendant/descendan t refers to a person related to us > through > > the male lineage only—our mother, since she took our father's name > > after marriage, changed her lineage. Another school of thought is > > that the mother's mother i.e. the Nani and the mother's father > i.e. > > the Nana too are relatives within the meaning of Section 56 and > > there shouldn't be any problem accepting gifts from them. > > > > I am more inclined to believe the second line of reasoning. > > Especially in these times it seems too sexist and Manu-like to > argue > > that mother's Mom and Dad have got nothing to do with our > ancestry. > > But for our mothers we wouldn't be here. But for our fathers we > > could still have been here since this is the age of artificial > > insemination! In the absence of any statutory definition of lineal > > ascendant/descendan t in the I T Act, we can safely derive our > > meaning from the sense in which these words are understood > > ordinarily-- we have descended from our Mother as much as, if not > > more than, our father. > > > > The Hindu Marriage Act 1955 also defines a "Sapinda relationship" > as > > a relationship that "extends as far as the third generation > > (inclusive) in the line of ascent through the mother, and the > fifth > > (inclusive) in the line of ascent through the father, the line > being > > traced upwards in each case from the person concerned, who is to > be > > counted as the first generation"> > > > So the HMA recognizes "ascent through the mother".> > > > Based on the above, in my opinion, Nanas and Nanis are relatives. > > > > Thanks,> > > > CA Sanjeev Bedi> > > > > > --- In http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com, "priyankkabra" > > wrote:> > >> > > Who all are covered in Lineal Ascendent or Descendent?> > > Whether father, mother, grandfather, grandmother paternal as > well > > as > > > maternal, i.e., dada dadi n nana nani are covered?

TDS on Hostel--Boarding and Lodging

2008-08-07T06:49:00.000-07:00

Hi Ganesh,

I would put my money on tax being deductible u/s 194I rather than Section 194C. The meaning of "rent" given in Section 194I is pretty wide. Amount paid to a hostel owner for accommodating the company's workers seems to fit more snugly into Section 194I than Section 194C. You yourself have said that your company has contracted with the hostel owner to rent out a dormitory with a view to cut down attrition rates. So it's basically a contract for "accommodation" . You can't prevent employees from changing jobs by holding out the incentive of boarding alone. Primarily it's the guarantee of lodging that you hope to bring down your attrition rate with. The hostel owner is always going to argue in favour of Section 194C as the TDS rate for Rent is 7.5 times. And it doesn't really matter what's the structure of the bill—a predominant part of the hostel bill may constitute expenses on account of boarding. That wouldn't alter the nature of this payment. The following case law is an instructive one:[The definition, for the purpose of the Income-tax Act, of the nomenclature `rent' as expounded in the Explanation to section 194-I itself amply reveals that the same is projected as the generic term which includes within its ambit payment made ON WHATSOEVER ACCOUNT for occupation of a tenanted portion. After taking into account the definition of rent, it apparently appears to be a composite concept. Once the rent is comprehended as a composite concept then it is not capable of being fragmented - Smt. Bishaka Sarkar v. Union of India [1996] 219 ITR 327 (Cal.).]In view of the above interpretation of "rent" by the court, I think you can't even bifurcate the payment into Boarding and Lodging Expenses and deduct TDS at two different rates. The whole of the amount paid to the hostel owner would be subjected to TDS u/s 194I.How about the employees directly paying up to the hostel owner and getting reimbursement from the company?Thanks,CA Sanjeev Bedi--- In http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com, "Ganesh P." wrote:>> Dear Professionals> > I have a query on TDS on the amount payable to the Hostel owner. I give> below the facts of the case and seek your valuable advise:> > Facts of the case:> We have introduced a dormitory system in order to tackle the attrition> problem with relation to our Operators. We have tied up with a Working> employees hostel who will provide an entire floor of the premises> exclusively for us to use for our operator purposes. We would be paying> a flat amount as the Accommodation charges (as we refer presently) which> includes the charges for a minimum of 100 employees for their stay, food> and other charges viz. electricity, water etc.> > Query:> Now would like to know whether the above payment would attract TDS u/s> 194I or u/s 194C as the predominant portion is for the catering services> only as arguable by the Service provider. The net inflow for the> service provider would be very less if the case is argued as "Rent" as> the rate is higher.> > Your views please...> > Best regards,> Ganesh> Senior Executive - Finance Intimate Fashions (India) Pvt Ltd Ph: +91> 44 6740 4400 Extn: 4452 Ph: +91 44 6740 4452 (D) Fax: +91 44 6740> 4692 Mobile: 98400 89137

Re: Claim of housing loan interest--Property in Mom's name

2008-07-29T03:35:00.000-07:00

Hi Purnima,

The sine qua non of deduction of interest u/s 24 as well as the deduction of principal u/s 80C is that the income in respect of which the deduction is sought to be claimed must be assessable under the head "Income from House Property"--- in the hands of the assessee and not just anyone. A son doesn't become liable to be taxed for the house property owned by his mother. As such your client won't be able to claim deduction of interest u/s 24(b). Even if the property had been owned jointly, your client would've been able to claim proportionate deduction. But even now if the property gets re-registered in the son's name—after being duly mutated in the land revenue records—the son will be able to claim the housing loan interest. But that might involve coughing up stamp duty at the sub-registrar' s office. Some states have exempted payment of stamp duty in case of family transfers of immovable properties. Verify it from the Sub-registrar' s office. Thanks,CA Sanjeev Bedi--- In http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com, Purnima Jolly wrote:>Hi Friends, I have a query related to claim of housing loan interest. One of my client bought a house in the name of his mother by availing loan from bank. Can he deduct the payment of interset on housing loan from his salary income. Thanks and regards Purnima

Disallowance of Bonus u/s 43B

2008-07-25T20:50:00.000-07:00

From: Sanjeev Bedi Subject: {amresh's-CA's} Re: Disallowance u/s 43B--Performance BonusTo: ICAI_CIRC_MEERUT_CA@yahoogroups.comDate: Friday, July 25, 2008, 12:52 AM
Hi Anand,You seem to be right. The great idea behind introduction of Section 43B into the Act was to create a disincentive for the assessees who under the guise of mercantile system of accounting simply made book entries without bothering to dispense cash to the employees/governmen t authorities for long periods of time. This is what the Objects and Reasons (paras 59 and 60) of Finance Act 1983 which brought in Section 43B states (capitalization mine): [Several cases have come to notice where taxpayers do not discharge their STATUTORY LIABILITY such as in respect of excise duty, employer's contribution to provident fund, Employees' State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand they dispute the liability and do not discharge the same. For some reason or the other undisputed liabilities also are not paid. To curb this practice, it is proposed to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the lime being in force (irrespective of whether such tax or duty is disputed or not) or any sum payable by the assessee as an employer by way of contribution to any provident FUND or superannuation FUND or gratuity FUND or any other FUND for the welfare of employees shall be allowed only in computing the income of that previous year in which such sum is actually paid by him]The emphasis clearly is on statutory liability and not just any other contractual liability arising as a result of mutual agreement between the employer and the employee. The Kolkatta High Court in the case you cited--Exide Industries Ltd. v. Union of India [2007] 164 Taxman 9—did strike down clause (f) of Section 43B as unconstitutional and unconscionable. The court ruled that leave encashment provision was allowable merely on accrual basis. Parliament had injected clause (f) relating to LWW in Section 43B in the FA 2001 to scuttle the Apex Court decision in of Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC). The Supreme Court had allowed in that case the leave encashment expense on the basis of a mere provision. On the government's move to disregard the judge-made law in Bharat Movers case by bringing in clause (f) in Section 43B, the High court had this to say:[We do not for a single moment observe that the Legislature was not entitled to bring such amendment. They were within their power to bring such amendment. However they must disclose reasons which would be consistent with the provisions of the Constitution and the laws of the land and not for the sole object of nullifying the Apex Court decision]The High Court struck down clause (f) as unconstitutional, arbitrary and de hors the SC decision in Bharat Earth Movers. Based on the above discussion, in my view, performance- linked bonus—and not the one that the employer is statutorily required to pay to the employees in pursuance of the Payment of Bonus Act—can be claimed on the basis of an entry in the books of account, notwithstanding that it hasn't been disbursed before the filing of return of income.To avoid conflict you might consider changing the nomenclature of this payment—look up synonyms of Bonus in the OED!
Thanks,

CA Sanjeev Bedi

--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, anand mishra wrote:>> Dear friends,> > This is regarding disalloances of Bonus under section 43B of IT Act, I am of opinion that section 43B is restricted up to payment of statutory Bonus covered under payment of Bonus Act. payment of bonus in the nature of ex-gratia / performance bonus should not be covered under this section and same may be allowed on accrual basis.> > Specially after decision of Kolkata high court in exide industries case in case of leave encashment, it is clear that only statutory bonus will be covered under 43B , exgratia or performance bonus will be allowed on acrrual basis. > > If you have any other opinion or any case law in support of this, please share with me.> > Regards,> > Anand Mishra

FBT on car insurance

2008-07-25T07:39:00.000-07:00

Hi Rahul,

Mr J P Aggarwal, the doyen of the group, has answered your query quite exhaustively. Indeed if we go by the CBDT circular, it's difficult to contend that car insurance is not "car running and maintenance" as envisaged u/s 115WB(2)(H). If your car isn't insured in respect of third-party indemnification, you can be challaned by traffic cops. So at least the third-party insurance is a necessary expense to run the car. But most of us go in for the comprehensive insurance cover these days, which covers the risk of damages to our car as well. May be we can make a case for not shelling out FBT on the component of insurance premium other than that attributable to third-party insurance at least, since we have an option not to take it!If you look up the Bare Act, Section 115WB(2)(H) says this:[(H) repair, running (including fuel), maintenance of motor cars and the amount of depreciation thereon]Notice the words within brackets "including fuel"? Pray, how on earth can you run a car without fuel (LPG/CNG is also a variant of fuel)? Expenditure on fuel is the prime expenditure you incur to get a car running. So where was the need to insert these words? This shows the lawmakers don't want to give a restrictive meaning to "running and maintenance" . This is also evident from even driver's salary and interest on car loan being subjected to FBT on the grounds that these constitute car running expenses!Car Insurance pe FBT lagega, mere vichar mein.Thanks,CA Sanjeev Bedi--- In http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com, "CA J P Agarwal" wrote:>> Dear Friends,> > The CBDT circular on FBT (probably dated 28.7.05) covered salary paid to driver as well as garage rent to be included as motor car repair and maintenance for FBT, so as per CBDT insurance would also be covered (I don't remember if insurance was also specifically mentioned) on the reasoning of proximate purpose.> > Thus, if the matter is petty go by the CBDT but if you want to contest and you client is willing than you should contest it. Insurance is treated as different from repairs u/s 31 of IT Act and cannot be treated as repair or maintenance.> > Repairs and insurance of machinery, plant and furniture.> > 1531. 16In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or profession, the following deductions shall be allowed-> > (i) the amount paid on account of current repairs thereto ;> > (ii) the amount of any premium paid in respect of insurance against risk of damage or destruction thereof.> > 18[Explanation. -For the removal of doubts, it is hereby declared that the amount paid on account of current repairs shall not include any expenditure in the nature of capital expenditure. ]> > > Now coming to wild theory of proximate purpose of CBDT, as described in CBDT circular , I don't think the proximate purpose of any business expenditure is to run the motor car but is to run the business and make profits. Now as per my wild theory, Expenses incurred for making profit is not covered by FBT so none of the expense would be covered by FBT.> > I would seek expert views.> > CA J P Agarwal> J P Associates> Jhansi> ----- Original Message ----- > From: Pramod Vaya > To: http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com > Sent: Thursday, July 24, 2008 2:46 PM> Subject: Re: {amresh's-CA' s} FBT on car insurance> > > Dear Mr Rahul,> > Althought, it is not strictly falling in the definition of repairs and maintenance but still the insurance expenditure would fall under the category of maintenance of the vehicle. Therefore, it will be subject to FBT.> > I would find out in case, any case law support on this.> > Thanks> Pramod Kumar> > > On Wed, 23 Jul 2008 rahulblyca wrote :> >Dear Sir> >> >Whether FBT is payable on car insurance? As per my view car insurance> >is not a part of repair & maint.> >> >Pls. advice. If there is any case law, notification etc. pls. let me> >know.> >> >Regards> >> >CA Rahul Agarwal> >

Taxability of Notice Pay

2008-07-24T05:41:00.000-07:00

Hi Dhruv,

In my opinion, only the net salary—remaining after the deduction of notice pay—would be taxable in the hands of the employee. Had it been the other way around i.e. the employee had been fired instead of resigning on his own, the employer would have paid him a month's (or whatever the period of notice) salary. That amount would've been taxable in his hands, wouldn't it? Now that the employee has foregone a month's salary for leaving all of a sudden, shouldn't he be entitled to have that amount knocked off his gross salary? But there's no scope of any deduction from salary---the list of items that can be deducted out of salary as mentioned in Section 16 is exhaustive, the purists might argue. My contention is: the employee was made to forego that salary as part of the terms of employment he had with the employer. I don't think it's an application of income, like say a manager working in a charitable organization foregoing his salary. The manager would still be liable to get taxed on that amount because he's done it voluntarily. But the salaried guy who decides to say goodbye to his employer after finding greener pastures elsewhere isn't foregoing his pay voluntarily—the terms of the employment leave him no choice but to part with a certain period's salary. He gets taxed for the salary he gets in pursuance of the terms of the employment. So how can we tax him for the salary he has had to give up in pursuance of the terms of employment?We do have a case law on this. The facts aren't exactly the same, but the principles of salary taxation have been discussed beautifully. In the case of CIT v. Bachubhai Nagindas Shah [1976] 104 ITR 551 (Guj.), the assessee was appointed as a director of the company on a remuneration of Rs. 400 per month. As the company incurred heavy losses, the board of directors of the company resolved that the directors should waive their rights of remuneration in the previous year. Consequent to this resolution the assessee waived his right of remuneration of the sum of Rs. 4,800, which had become due to him in the relevant previous year for the assessment year 1963-64. The ITO assessed the remuneration of Rs. 4,800 as part of the income of the assessee in spite of the waiver of remuneration by the directors.The matter came up before the Gujarat High Court. The court ruled that income tax is a levy on income. Though the Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a `hypothetical income', which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, tax may be payable. Where, however, the income can be said to have not resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. The Court suggested that appropriate relief must be afforded in the year of waiver out of deduction from salary income even though the Act does not contain any specific provision in this regard.The court citing the SC decision in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) and the Bombay HC decision in H.M. Kashiparekh & Co. Ltd. v. CIT [1960] 39 ITR 706 (Bom.) went on to elaborate the concept of Salary and its taxation in the following words:[Before we part with this case we may point out that the Legislature has provided that salary becomes taxable when it becomes due, that is, on the accrual basis and whether you call it `accrual basis' or to use the language of the relevant section of the Income-tax Act, 1961, say `when the amount of salary becomes due', the principle is the same. It is because of these special provisions of the Income-tax Act, 1961, section 15, that we have come to the conclusion in the instant case that the assessee is liable to pay tax on the amount of salary that became due to him even though subsequently he waived his right to receive the remuneration. However, it appears to us that it is the very basis of the principle of a particular amount being considered as income on the basis of accrual that if at any subsequent point of time it is found that that amount is not deemed to have been received on the basis of accrual or has not in fact been received and the right to receive that amount has been given up because of circumstances of the particular case, then in the year in which the right to receive the money has been waived or given up or agreed to be given up is the period during which an appropriate relief must be given by way of deduction to the assessee concerned because if that were not to be done, the very basic principle of accrual is violated. That principle is that though not received on the basis of accrual, it is due to be received and the tax is payable and has to be paid on that basis. If subsequently it becomes clear that that amount is not to be received though accrued earlier and is not going to be received at all, it is in the fitness of things that corresponding deduction for the amount waived or written off should be given to the assessee in the year of account in which such amount is written off or waived or debited. It is on this basis that in the system of mercantile account keeping, bad debts are written off and deductions are allowed on the basis of bad debts being written off in the year in which the debt is written off by the assessee concerned. It is true that so far as `salaries' are concerned, the income chargeable under the head `Salaries' shall be computed after making the deductions set out in section 16 and the deduction of the type that we are pointing out is not contemplated by the actual words of section 16. But what we are pointing out goes to the very root of the notion of `income' and before anything can be considered `income', this principle which follows from the basic approach of `income accrued' being considered on the same footing as income received must be accepted. It is for the authorities concerned to consider whether in the year in which the assessee agreed to waive his right to receive the amount of Rs. 4,800, he would be entitled to the deduction of this amount on the ground that that which had accrued was in fact not received by him. We are conscious that we cannot issue any directions to the income-tax authorities in this connection but we thought it our duty to explain the legal position as we see it."]In the light of the above discussion, in my view, only net salary (after adjustment of notice pay) need be reported in Form 16. An appropriate footnote may be appended explaining the adjustment. These days the new employer also undertakes to bear the loss arising to the employee on account of his suddenly leaving the previous employer. This reimbursement of notice pay by the new employer is taxable under the head Salary as Profits in lieu of salary u/s 17(3)(iii)(A). So even from a commonsensical point of view, the poor Naukriwala can't be made to pay tax on the same amount twice. Thanks,CA Sanjeev Bedi--- In http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com, "Dhruv Arora" wrote:>> Dear Members> > As a usual practice, most companies require their employees to inform them> in advance (a prescribed period), in case they want to leave the job.> It is mandatory for the employee to serve such prescribed period, before he> or she can be relieved.> If the employee fails to serve the notice period he or she is liable to> monetary penalty.> > Now, my question is that can employee claim such penalty against the Salary> Income?> Form No. 16 issued by the company, states the Gross Salary only.> However, the full an final settlement sheet, issued by the company on his> letterhead, mentions such deduction.> > Kindly advise, it would be of great help if a supportive provision/case law> can be provided with.> > Regards> CA Dhruv Arora> Meerut

Provision for Gratuity--Nine is the Number

2008-07-24T05:26:00.000-07:00

Hi Lalita,

A company gets covered under the Payment of Gratuity Act for all time to come the moment the number of employees on its rolls crosses 9. Do check that your company has never had a double-digit staff strength ever since its inception. If nine is the maximum number that your company has ever employed, then there's no question of making a provision for gratuity under the Payment of Gratuity Act 1972 read with Section 2(m) of the Factories Act 1948.I think the auditors suspect that since you're just one employee shy of getting hit by the Gratuity Act, it's just a matter of time before a liability to pay gratuity under that Act arises. But as far as I understand, in determining the liability for gratuity, once you're covered, you don't take into account the period served by the employees prior to the date when the company got covered under the Act. The 5-year count down will start from the day of coverage. Also may be the auditors think the company may voluntarily pay up gratuity to a long-serving employee. Accrual basis accounting will demand that a provision be created from year to year in that event. What you should do is give an undertaking to the auditors—in the Management Representation Letter to be issued in pursuance of AAS 11---that the company has never been covered by the Gratuity Act as it didn't have the required number of employees on its rolls; also that it does not intend to make a voluntary gratuitous payment to any employee at present or in future that would necessitate a provision in the books of accounts. This ought to pacify them auditors!Thanks,CA Sanjeev Bedi--- In http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com, lalita arora wrote:>> Hi,> Â > If the Gratuity Act is not applicable to the company, Is it still require to provide "Provision for Gratuity" in its books of accounts?> Â > Actually our company has only 9 employees. So Gratuity Act is not applicable to our company. But our auditors want to provide forÂ gratuity in the books of accounts assuming that the number of employees might increase in the next year.> Â > Â > Pls send ur replies with reference to some case laws/ section/ circular/ notification to support your reply.> Â > Â > > Regards,> CA Lalita Arora

Arrears of Freedom Fighter Pension-Relief u/s 89

2008-07-16T06:39:00.000-07:00

Hi Balu,

As far as I know not all sorts of pensions received by freedom fighters are exempt. Only the amount received consequent to a gallantry award being conferred on someone or an amount one gets in pursuance of a scheme approved by the Central government u/s 10(17)(ii) will be exempt in the hands of the recipient. The government had notified a scheme called the Swatantrata Sainik Samman (Honour to Freedom Fighters) Pension Scheme, 1980 in exercise of the powers conferred on it u/s 10(17)(ii). This scheme was originally floated on 15th August 1972 to mark the 25th anniversary of the Indian independence. In 1980 this scheme was made more liberal with a view to cover more people. Only pensions drawn by freedom fighters under this scheme are exempt. All other pensions in my opinion in the absence of any specific exemption notification would be brought to tax under the head "Income from other sources" u/s 56. Your point about the absence of employer-employee relationship is valid. But that doesn't automatically lead to the conclusion that the income isn't taxable at all. Section 56 is a default section. If the income doesn't fit into any of the four heads and isn't exempt, it'd be taxable u/s 56. The assessee won't be entitled to deduction u/s 57(iia) either since this isn't a family pension—-he himself is drawing it. The relief u/s 89 too it seems would elude the assessee.Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "balunand" wrote:>> Is there an employer-employee relationship here? In my opinion you > should claim the entire amount as exempt.> > Regards> Balu> www.balunand. com> > > > --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Gaurav" > wrote:> >> > Hi everybody,> > > > My Grandfather received arrears of freedom fighter and political > > pension during last year. Whether I can claim relief u/s 89 for > the > > arrear. If I can, whether their is any case law on this. Actually > our > > professional person is denying that we can't take relief. We are > > currently showing pension receipt under head 'Income from Salary"> > > > Please reply....> > > > Thanks in advance> > > > Gaurav Pancholia> > > > (pancholia.gaurav @ gmail.com)

Exemption u/s 54--Investment in Two houses

2008-07-14T07:28:00.000-07:00

Hi Brijesh,

Yes, there shouldn't be a problem in claiming exemption u/s 54 in such a case. The words used in Section 54 are "a residential house". When we look at Section 54 vis-à-vis Section 54F, the condition of not owning more than one house on the date of transfer laid down in Section 54F stands out and sets it apart from Section 54, which contains no such stipulation. So profits from sale of two properties, provided they were both used for residence, can be invested to claim exemption u/s 54. Now let's look at the investment aspect. Can we invest in more than one house and claim exemption u/s 54? Black's Law Dictionary defines the indefinite article "a" appearing in legal texts as not necessarily relating to a singular item and that it is often used in the sense of `any' and is then applied to more than one individual object. The Strout's Judicial Dictionary too echoes similar views---the word `a', it says, is most frequently the equivalent of the word `any'. And Section 13(2) of our desi General Clauses Act says that singular includes the plural.There are plenty case laws in our favour too. In the case of Rattanlal Murarka [BCAJ 2003, IT Appeal No. 4485/(Mum.)/ 99], it was held that there is no bar imposed under section 54(1) on the assessee claiming exemption in respect of reinvestment of the capital gain in more than one house, provided other conditions of the section are satisfied. In this case the assessee had bought up two houses—-one in Thane and the other in Pune. The exemption was allowed in respect of the total investment made in two houses. Another case law in point is D. Anand Basappa v. ITO [2004] 91 ITD 53 (Bang.).In some cases though the courts have ruled that investment in only one house is eligible for exemption u/s 54. But enlightened opinion is more inclined towards not interpreting the meaning of article "a" appearing in Section 54 as to restrict it to a singular object only. This is also in keeping with the intention behind the introduction of Section 54--to incentivise housing in the country. Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "gujratibrijesh" wrote:>> If any person sold two residential house property (long term capital > gain was arises ) and the sale consideration was invested in two > redidential house property can he claim exemption U/s 54 if any case > decided by court in this regard please send detail > > CA Brijesh Kr Gujrati> Varanasi>

Minor's income--Father no more; Mother remarries

2008-06-21T04:03:00.000-07:00

Hi Anuj,

Regarding the clubbability of the minor's income after the death of either of the two parents, the question that we'd need to answer is: Can the marriage still be said to subsist even after the husband or the wife is no more? Section 64(IA) has not dealt with the situation that would arise if either or both of the parents of the minor die. It has envisaged a situation of divorce of the parents—in that event the income would be clubbed in the hands of the parent that maintains the child. > > Does the marriage cease to subsist upon the death of the husband (or the wife)? The Mumbai Tribunal had had an occasion to decide on a similar issue. In Mrs. Rohita Subramanium v. Dy. CIT [2002] 75 TTJ (Mum.) 101, Mrs Rohita's husband had died. The question was: In whose hands would the minor child's income be clubbed? The Tribunal held that the marriage does not break down upon the death of either of the spouses; it subsists even after the death of one of the couple. Whilst both the parents were living, the minor's income was tagged to the parent having higher income. Since death of either spouse doesn't lead to collapse of the marriage, we'd still club the minor's income in the hands of the parent having higher income. Since the child's father is dead and has therefore Zero income, the mother clearly has "higher" income. As such, we shall club the minor's income in the mother's hands. > > The Tribunal in this case seems to have interpreted "subsistence" of marriage in a rather legalistic than a commonsensical manner. A marriage subsists as long as the couple hasn't voluntarily decided to part ways; death being an Act of God does not kill the marriage. The Tribunal members seem to have given their verdict thinking along these lines.> > But the Lucknow High Court in Smt. Laxmi Agarwal v. Asstt. CIT [2003] 133 Taxman 114 (Luck.) (Mag.) saw this issue in an entirely different manner. It ruled that in the case of death of a parent it isn't possible for the revenue to club the minor's income, unless it is proven that the surviving parent maintains the child. So in your client's case where the mother has remarried after the father's death and the grandparents are taking care of the kids, the income won't be clubbed in the mother's hands. > > So the jury is still out on this one. But to me, the Lucknow HC judgement sounds more sensible. And As I had opined in the case where both parents kick the bucket leaving behind the minor with a stream of income; in case of death of the father too, in my opinion, nothing would be taxable in the minor's hands, if it's the grandparents of the child who are maintaining her. This is also supported by the well-accepted dictum of law that in the absence of the machinery provisions in the Act to give effect to the provisions of the charging section, the charging section fails. > > In no case can a minor be taxed directly unless she's a child artist or the like or is physically challenged. > >

Thanks,>

CA Sanjeev Bedi> >

--- On Tue, 6/10/08, Anuj Gupta wrote:> > From: Anuj Gupta > Subject: Minor's income; Parents no more> To: ICAI_CIRC_MEERUT_ CA@yahoogroups. com> Date: Tuesday, June 10, 2008, 3:35 PM> > > > > > > > > I came across a situation which is similar to the query answered by the star contributor Sh. Sanjeev Bedi but yet unique also, because in my case the father of the children has died and the mother has remarried, leaving the custody of children with the grandparents, who have applied for the guardianship of the children.> > Now the children have got money from LIC and also the other sources to invest. Who will be liable to tax on such interest income received from investments made in name of children.> > Regards> > CA. Anuj Gupta> > >

Re: Minor's income; Parents no more> > > > >

Hi Piyush,> >

With the death of both the parents, the clubbing provisions of > Section 64(1A) go out the window. Even if the parents divorce, > clubbing provisions still hold; the kid's income is clubbed along > the income of the parent who maintains the kid. But in the > unfortunate event of both Mummy and Daddy Allah-ko-piara hoeing, > there's no way you can club the child's income with any of his > uncles, aunties or grandparents.> > Consider the following judgement of Chennai Tribunal in the case of > R.P. Sarathy v. Joint CIT [2005] 97 TTJ (Chennai) 801; [2006] 5 SOT > 731 (CHENNAI):> > [Facts:> > The parents of the assessee, who was a minor, died in an accident in > June/July 1993. Her grandfather sent her to school under his > guardianship. She inherited movable and immovable properties of the > deceased parents and also from her grandmother. The amounts received > by her by way of inheritance and gifts on birthdays were invested by > her grandfather. For the relevant assessment years she computed her > income and filed nil return on the ground that the income of minor > was not taxable. The Assessing Officer, however, assessed the entire > income in the hands of the legal representatives of the assessee. On > appeal, the Commissioner (Appeals) confirmed the action of the > Assessing Officer.]> > On appeal the Tribunal held that none of the exceptions (divorce or > personal skill of the minor) applied to the assessee as neither of > the parents was surviving. The minor was not liable to file the > return of income as per the provisions of the Act, in case both the > parents were not alive. Section 64(1A) does not speak about the > situation where both the parents are not surviving. But from > Explanation (b) to sub-section (1A) of section 64, it can be easily > conferred that the minor's income, in case both the parents are not > alive, cannot be assessed in the hands of the grandparent or any > other relatives. Further, there is no provision to assess the > minor's income in the hands of the minor and if the parents do not > survive, then that income cannot be clubbed in the hands of any of > his grandparents or anybody who maintains the minor child. Since the > parents of the minor were not surviving in the instant case in hand, > the income of the minor could not be clubbed in the hands of her > grandfather. Accordingly, the orders of the lower authorities were > quashed.]> > So it is clear that in the absence of both the parents, clubbing is > ruled out. The above judgement also correctly says that there is no > provision to assess the minor's income in the hands of the minor > himself, barring that manual skill/child prodigy exception. So does > that mean in the instant case, nothing would be brought to tax on > the interest earned on FDRs created out of insurance proceeds > received from the LIC consequent to the death of the parents? > > The answer it seems, also taking the ratio of the above ruling into > account, is: Yes. It seems the lawmakers, whilst they did visualize > the divorce and the child prodigy situations, forgot to think of a > situation where both the parents depart for their heavenly abode > leaving the underage kid behind. What would happen to the surviving > minor child's income? > > In my opinion, it won't be taxable at all.> >

Thanks,> >

CA Sanjeev Bedi > > ---

Dear All,> >

Please guide me in following matter:> > One minor has received plenty of funds from LIC due to the death > of his both of the parents. At present the said minor child is under > the guardianship of his maternal uncle. The amount of funds so > received is proposed to be invested in bank FDRs. In whose income > this interest income would be clubbed. Whether, in such case, since > due to the death of the both of the parents, can return of the minor > be filed through any representative assessee without attracting the > clubbing provisions u/s 64(1A).> > I shall be very thankful for the kind guidance in the aforesaid > matter.> > With Regards.> > CA. Piyush Jain (Rishikesh)

AGM of a private company---Shareholders Abroad

2008-06-13T04:29:00.000-07:00

Hi Vishal,

Although an EGM may validly be held even on the planet Mars, an AGM has to be held at the registered office of the company only. Section 166 lays down that members have to be physically present. Proxies won't do. Proxies appointed u/s 176 don't count for the purposes of determining whether Quorum u/s 174 has been reached. But I think there's nothing to preclude a private company, which isn't a subsidiary of a public company, to amend its Articles in such a way as to provide that even proxies will be counted towards the quorum. You haven't said if the holding company of the Indian subsidiary in question is a public company?Another way out is to first convene the meeting and then adjourn it for want of quorum. Quorum isn't required at the adjourned meeting. Section 174(4) and (5) say that if the quorum isn't present at the adjourned meeting, the members present shall constitute the quorum. The significant words here are "members present". A presence of only 2 members suffices to make up a quorum in case of a private company. And if neither of them is present either in the original or the adjourned meeting, can we say that in the adjourned meeting the members present, being Zero in number, constituted the quorum? I think if you can have even one of the members fly down to India, it would be a perfectly valid AGM, if held in the manner discussed above. But I feel—theoretically at least---a general meeting can be legally held even in the event of presence of none of the members of the private company in the adjourned meeting.

Thanks,

CA Sanjeev Bedi

In http://us.mc508.mail.yahoo.com/mc/compose?to=ICAI_CIRC_MEERUT_CA%40yahoogroups.com, vishal pasad wrote:>> dear members,> > one indian subsidairy pvt ltd company 's shareholders are NRI , > > they not been able to come in india in 2008 . but agm must be held in india as per companies act in india only , for which shareholders should be present in india .> > but in above case shareholdes are not present in india, > > we want to fix the date og agm now, & place.> > so is ther any way out by which agm date can be held in any other country or shareholders own country . of above mentioned indian pvt ltd compoany .> > plz guide > > regards> > vishal

Depreciation Cos. Act--Minimum Rates

2008-06-13T04:25:00.000-07:00

Hi Josh,

Yes, you can provide depreciation under the Companies Act at rates different from those laid down in Schedule XIV to the Cos Act. But the rates the company chooses, on a scientific evaluation of the life of the assets, can't be lower than those mentioned in Schedule XIV. Note 5 below Schedule XIV says this:[5. The following information should also be disclosed in the accounts:(i) depreciation methods used; and(ii) depreciation rates or the useful lives of the assets, if they are different from the principal rates specified in the Schedule.]This note read with Section 349(4)(k) and Section 350 would mean that there's no problem if a company chooses to determine depreciation on the basis of the useful lives of the assets determined by itself. If the useful life of the assets as determined by the company happens to be lower than the life of the assets based on which Schedule XIV rates are prescribed, then the higher amount of depreciation dictated by such lower life can be provided, ignoring what Schedule XIV says. But if the company estimates the lives of the assets to be more than that envisaged by the DCA under Schedule XIV, it doesn't have the liberty to charge depreciation at lower rates. Schedule XIV rates are the minimum ones. The Expert Advisory Committee of the ICAI has also opined thus.Actually, managements may be tempted to inflate their profits to increase their managerial remuneration, which is based on a percentage of the book profits. So companies have been permitted to provide depreciation at rates higher than those mandated by Schedule XIV. But they can't do that at rates lower than those. Under the Tax laws, you can't claim depreciation at rates higher than those specified in Rule 5; under the Cos law, you can't charge depreciation at rates lower than the ones mentioned in Schedule XIV. A proper disclosure in the Notes to Accounts of course would be required. A leasehold land is not depreciated; rather its cost is amortized over the period of the lease. The initial amount paid is a sort of Advance Rent. The annual amortization would constitute "Outgoings" u/s 349(4)(j) for the purposes of determining net profits.

Thanks,

CA Sanjeev Bedi---

In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "josh" wrote:>>

Dear Members> >

My query is regarding Depreciation. > > 1. As rate of depreciation has been prescribed in Schedule XIV, > can any company chose the rate of depreciation other than rate in > Schedule-XIV by disclosing the fact in the note of account?> > 2. Rate of depreciation for the land has not been prescribed in > schedule XIV. In case of land leased for exploration on iron ore, coal > or minerals, where value of land depleted/ attenuated during the > course of extraction of Ore, mineral etc. Can depreciation will be > applicable in this case and if yes at what rate?

No the ITO cannot issue a Blanket Certificate u/s 28AA

2008-06-05T06:48:00.000-07:00

Hi Mr Tejasvi,

No the ITO cannot issue a Blanket Certificate—that the assessee can use to cover each and every person who is a source of income for him---for deduction of tax at source at a lower rate or a Nil rate. Rule 28AA clearly prohibits that: [28AA. (3) The certificate shall be valid only for the person named therein.(4) The certificate shall be issued direct to the person responsible for paying the income under advice to the applicant.]The way Form 13, in which the application for lower deduction of tax is made, is worded also doesn't leave any room for doubt that this Certificate is specific to the payer of income. Here's how the text in Form 13 reads: [I,_____of__ ____do, hereby, request that a certificate may be issued TO THE PERSON RESPONSIBLE FOR PAYING TO ME the incomes/sum […..] ]The AO has clearly erred. You should point this out to the AO and have the certificate amended and addressed to the specific person who's the payer of income in this case. There might be problems otherwise. Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "CA. S.R.Tejasvi" wrote:>> Dear Sirs,> Recently I came across a certificate issued by an Income Tax officer, authorising any person liable to deduct tax on payment made to the assessee, to deduct tax at lower rate.> Is it proper for the officer to issue such a blanket certificate authorising any person liable to deduct tax?Â Didn't the certificate is meant to be issued to specific person?> Kindly clarify.> Thanking you,> Yours faithfully,> CA. S.R.Tejasvi

Section 11--Charitable Trust: What is "Income"?

2008-06-02T00:07:00.000-07:00

Hi Abhishek,

The question before us is: What constitutes "Income" of the trust u/s 11 for the purposes of examining whether 85% of it has been applied to charitable activities? There's nothing arcane, esoteric or mysterious about the word "Income" used in Section 11. Scores of decided laws have laid down that what constitutes "Income" in terms of Section 11 has to be determined in a commonsensical manner, according to the normal rules of accountancy. By Income here we mean nothing more than what a layman would understand it to be. So it is fair to say that in case of donations and other receipts in connection with which we do not incur any expenses, we would need to calculate the figure that we have to spend by applying the percentage of 85 to the total amount of Cash Inflow the trust has had during the year. But in case of business or other receipts, to know what's our "income" we'd have to look at the figure of Surplus, 85 per cent of which we shall be liable to spend on charitable activities. The emphasis in case laws, of whom there are numerous, has been on the Real Income. Real Income means the income that's actually been received, and not simply that's accrued to us. The expenses like salary and general administration incurred in connection with keeping the trust going aren't application of income and so they will have to be deducted to arrive at "income" that needs to be applied for charitable purposes. This has been held in the case of CIT v. Birla Janahit Trust [1994] 208 ITR 372/73 Taxman 465 (Cal.).Depreciation is an allowable expenditure. In CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust [1992] 198 ITR 598/[1993] 70 Taxman 228 (Guj.) it was said depreciation as per normal rules of accountancy should be allowed while computing income, as the income of the trust is not to be computed in accordance with the provisions of the Act but in a commercial manner. It may be noted that tax-free income like Agricultural income does not form part of total income for the purpose of computing the percentage to be applied or accumulated for future application. CIT v. Nabhinandan Digamber Jain [2002] 257 ITR 91/[2003] 128 Taxman 779 (MP).As far as the application of income is concerned, all sorts of layouts, whether on capital or revenue account, would qualify as having been applied towards the charitable ends. Thanks,CA Sanjeev BediMy query is : We need to apply at least 85% of the income of charitable trust for charitable purpose. Now the question is what is the meaning of income over here. Is it the "Gross Receipt" or is it the "Surplus", that we need to apply during the year. In my opinion We need to apply 85 % of the surplus and not the gross receipts, in case if we are having business income. And in the case of donation income or income from House property etc. it would be the gross income, out of which we need to apply the 85 %. Suppose in the case of an educational society, society is running a college and is also having donations. In the case of donations 85 % of the gross donation should be applied for educational (charitable) purpose and in the case of college fees received by the society, 85% of the surplus must be applied for the charitable purpose because all the expenses claimed for having the surplus are actually not the application of income, they are merely the expenses incurred for earning the gross receipts. I need to know, whether my view for the same is correct, and if yes, which case laws are in favour of my opinion. Waiting for your views. Regards CA. Abhishek Agarwal

Disallownace of Bonus U/s 43B

2008-05-27T07:02:00.001-07:00

Hi Anand,

You seem to be right. The great idea behind introduction of Section 43B into the Act was to create a disincentive for the assessees who under the guise of mercantile system of accounting simply made book entries without bothering to dispense cash to the employees/governmen t authorities for long periods of time. This is what the Objects and Reasons (paras 59 and 60) of Finance Act 1983 which brought in Section 43B states (capitalization mine): [Several cases have come to notice where taxpayers do not discharge their STATUTORY LIABILITY such as in respect of excise duty, employer's contribution to provident fund, Employees' State Insurance Scheme, etc., for long periods of time, extending sometimes to several years. For the purpose of their income-tax assessments, they claim the liability as deduction on the ground that they maintain accounts on mercantile or accrual basis. On the other hand they dispute the liability and do not discharge the same. For some reason or the other undisputed liabilities also are not paid. To curb this practice, it is proposed to provide that deduction for any sum payable by the assessee by way of tax or duty under any law for the lime being in force (irrespective of whether such tax or duty is disputed or not) or any sum payable by the assessee as an employer by way of contribution to any provident FUND or superannuation FUND or gratuity FUND or any other FUND for the welfare of employees shall be allowed only in computing the income of that previous year in which such sum is actually paid by him]The emphasis clearly is on statutory liability and not just any other contractual liability arising as a result of mutual agreement between the employer and the employee. The Kolkatta High Court in the case you cited--Exide Industries Ltd. v. Union of India [2007] 164 Taxman 9—did strike down clause (f) of Section 43B as unconstitutional and unconscionable. The court ruled that leave encashment provision was allowable merely on accrual basis. Parliament had injected clause (f) relating to LWW in Section 43B in the FA 2001 to scuttle the Apex Court decision in of Bharat Earth Movers v. CIT [2000] 245 ITR 428 (SC). The Supreme Court had allowed in that case the leave encashment expense on the basis of a mere provision. On the government's move to disregard the judge-made law in Bharat Movers case by bringing in clause (f) in Section 43B, the High court had this to say:[We do not for a single moment observe that the Legislature was not entitled to bring such amendment. They were within their power to bring such amendment. However they must disclose reasons which would be consistent with the provisions of the Constitution and the laws of the land and not for the sole object of nullifying the Apex Court decision]The High Court struck down clause (f) as unconstitutional, arbitrary and de hors the SC decision in Bharat Earth Movers. Based on the above discussion, in my view, performance- linked bonus—and not the one that the employer is statutorily required to pay to the employees in pursuance of the Payment of Bonus Act—can be claimed on the basis of an entry in the books of account, notwithstanding that it hasn't been disbursed before the filing of return of income.To avoid conflict you might consider changing the nomenclature of this payment—look up synonyms of Bonus in the OED!Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, anand mishra wrote:>> Dear friends,> > This is regarding disalloances of Bonus under section 43B of IT Act, I am of opinion that section 43B is restricted up to payment of statutory Bonus covered under payment of Bonus Act. payment of bonus in the nature of ex-gratia / performance bonus should not be covered under this section and same may be allowed on accrual basis.> > Specially after decision of Kolkata high court in exide industries case in case of leave encashment, it is clear that only statutory bonus will be covered under 43B , exgratia or performance bonus will be allowed on acrrual basis. > > If you have any other opinion or any case law in support of this, please share with me.> > Regards,> > Anand Mishra

Taxation of Kindergarten School

2008-05-27T00:39:00.000-07:00

Hi Shalini,

I reiterate once again: Income of a Society cannot be taxed, since it was never set up with a commercial motive. Educational institutions registered as societies will of course have to get their accounts examined by a CA if their gross receipts cross Rs 1 crore. But that is just to enable the government to keep an eye on the activities of such organizations— some unscrupulous people may camouflage their business ventures as non-commercial institutions engaged in furthering some social good. In such cases, the society would be just a smokescreen. The government will step in to lift the charity veil to see what lies behind the ostensible social activities. Section 10(23C)(vi) is designed to meet this end in case of educational institutions.As far as Kindergartens are concerned, it would depend upon the question `Whether or not the person running it derives her source of livelihood from it'? Merely registering as a society would not entitle you to claim exemption under the tax laws. In fact, if you are running the Kindergarten as a business venture and have filed your return as a proprietor, then you yourself admit that you're carrying on a business. In that event even operating under the Society form of organization would not absolve you from paying taxes. Section 10(23C)(iiiad) and (vi) clearly stipulate that exemption would be available only to institutions "existing solely for educational purposes and not for purposes of profit". But generally speaking if the preamble to the Societies Act is to be upheld, then I maintain that income of a society cannot be brought to tax no matter how high the annual surplus may be. It may be noted that I am saying this without prejudice to what the proviso to Section 2(15), which has come to occupy its pride of place on the Act wef 1st April 2008, states. The law has disregarded the original intention behind floating social organizations like societies, clubs, chambers of commerce, et al. Any activity resembling business or commerce engaged in by these "social" organizations will be taxed henceforth.Specific to your play school query, I wouldn't think you could now switch over to claiming exemption after two years of having declared the surplus as business income. Exemption can be claimed only if the person who manages the organization holds its assets and resources as a sort of trustee of the society at large. The organization does not belong to her and she can't have been deriving her livelihood from it. If she does, it can't ever be an institution eligible to claim exemption u/s 10(23(c) no matter what the gross receipts are. Thanks,CA Sanjeev Bedi --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Shalini Prakash" wrote:>> Sir,> The case of academic institutions is a different one, as they may claim exemption u/s 10(23) (c)(iii ad) , if income less than 1 crore, and u/s 10(23)(vi) if more than 1 crore.> > What will happen in case of society established for any other purpose? If the excess of income over expenditure is coming quite high, but none of the members is getting anything from it, will the society income be taxable? Or will it just have to file IT returns( incase the Excess of Income over expenditure is above 50000/-)( if excess of income over expenditure is less then 50000/- then it does not need to file ITR also?)> If a play school is there with classes from play group to UKG, but in the first two years the return has been filed under proprietorship. Can the school claim exemption u/s 10(23) (iii ad)ie gross income less then 1 crore? Till now the proprietor had not openede a seperate bank account, but was depositing it in her personal account. > What other care has to be taken to claim exemption?

Taxation of 1860 Society

2008-05-23T07:58:00.000-07:00

Hi Ajay,

I don't agree with you. There's no doubt about the tax rates of a co-operative society; paragraph B of the part 1 of the First Schedule of each Finance Bill specifies the rates of tax at which a co-operative society would be assessed. Presently, the exemption limit is Rs 10k. The point is: When the Act refers to a co-operative society, it refers to the society registered under the 1912 Act. There's a world of difference between a Co-operative Society registered under the 1912 Act and a Society registered under the Societies Registration Act 1860. I am copy-pasting below the preambles of both these Acts:[An Act to amend the Law relating to Co-operative SocietiesWHEREAS it is expedient further to facilitate the formation of Co-operative Societies for the promotion of thrift and self-help among agriculturists, artisans and persons of limited means, and for that purpose to amend the law relating to Co-operative Societies; It is hereby enacted as follows][An Act for the Registration of Welfare, Literary, Scientific and Charitable Societies.Whereas it is expedient that provision should be made for improving the legal condition of societies established for the promotion of literature, science, or the fine arts], or for the diffusion of useful knowledge, the diffusion of political education or for charitable purposes : It is enacted as follows]Clearly, a 1912 co-operative society is as different from an 1860 society as chalk from cheese. 1860 societies are mostly floated to promote education or some other such object. The 1860 Act is a pre-independence law. It exists in Pakistan also. After the 7/7 London blasts perpetrated by men who attended Madrassas in Pakistan, President Musharraf got all the Madrassas registered under the Society Registration Act, 1860. A co-operative society on the other hand is a just a self-help kind of group, members of whom unite for their own sake and not for the sake of public welfare. An 1860 society too may carry on business, but that business will be incidental to and for the furtherance of the main objective of some general public utility. Members of a co-operative society can distribute the profits from the co-op amongst themselves after 1/4th of the net profits have been transferred to a reserve fund. In case of an 1860 society, no member can receive profit even upon the dissolution of the society. All the assets once they've formed part of corpus of the society would be handed over to a kindred society. So a society registered under the 1860 Act would be assessed as an AOP and therefore entitled to the exemption limit of Rs 1.10k. That is, only if it's carried on some business activity. Routine surplus i/e. excess of income over expenditure of a society can't be brought to tax. That would be in violation of its very constitution and the parent Act of 1860. Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, ajay rajput wrote:>> Dear Friend,> > In Income tax a Society is assessed as such i.e. with the status of Co-Operative Society.> and the deduction is available under section 80P of the act, futher interest or dividend recevied from other co-operative society is also exempt as per section 80P.> > No surcharge shall be applicable on the society in income tax as well as for the purpose of FBT.> > as far as return is concerned ITR-5 is prescribed for this purpose .> > > With Regards > > CA AJAY RAJPUT > New Delhi> > ca.ajayrajput@ ...> > --- On Thu, 22/5/08, anshuman bardhan anshumanbardhan@ ... wrote:> > From: anshuman bardhan anshumanbardhan@ ...> Subject: {amresh's-CA' s} Re: Taxation of Society> To: ICAI_CIRC_MEERUT_ CA@yahoogroups. com> Date: Thursday, 22 May, 2008, 8:44 AM> > > > > > > > Dear Sir,> Specifically I want to know-> 1.About the status in which a Society would be assessed. I understand that it is AOP/BOI. Is it correct and if yes then the same exemption limit would apply to a society also in filing of returns.> 2. Will the same return form as applicable to AOP/BOI be applicable to Society also.> > Regds> Anshuman Bardhan > Anshuman Bardhan> Chartered Accountant> 690, Behind Tamrakar Badi,> Adarsh Chowk,Sunder& nbsp;Nagar,> Raipur (C.G.)

Can a private company borrow money from public?

2008-05-15T07:17:00.000-07:00

Hi Nilesh,

Right you are! A private company CAN borrow money from general public—that is from lenders other than its directors, shareholders and their relatives. Clause (d) of Section 3(1)(iii) defining a private company reads thus:[(d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives:]The word "Deposit" hasn't been defined in the Companies Act. Section 2A of the Act says that words and expressions not defined therein would derive their meaning from the Depositories Act 1966. We look up the Depositories Act but don't find "deposit" defined there either. Then we go to Section 58A, which contains similar prohibitions relating to acceptance of deposits. The Explanation at the end of Section 58A defines "deposit" to include borrowings as well. But it begins with the restrictive words "For the purposes of this Section". So that definition it seems can't be transported to Section 3(1)(iii)(d) to ascertain the meaning of Deposit used in that section. Explanation below Section 370 says "for the purposes of this section, "loan" includes any deposit of money". Here again it's difficult to see how this interchangeability of meaning assigned to Loan and Deposit in Section 370 could be extrapolated to Section 3(1)(iii)(d). Had the Explanation not been prefaced with the words "for the purposes of this section" as in Section 58A, we might have thought the legislature doesn't distinguish between Loan and Deposit and they essentially mean one and the same thing wherever used in the Companies Act. Under Section 227(1A)(d) one of the six matters on which the auditor is supposed to comment whilst framing his Audit Report in the case of a company is:[[d) whether loans and advances made by the company have been shown as deposits]This clearly indicates the lawmakers do not think Deposit and Loan are two sides of the same coin. So, in the absence of any explicit definition of "deposit" in terms of its acceptance by a private company, it seems we'd be better off giving this word its natural meaning. A thing to be noted in clause (d) is the use of the words "invitation or acceptance". A loan is never invited or accepted; a company short of funds would approach a bank or other moneylender to grant it a loan. In case of a Deposit, it'd be the other way round—the depositor would approach the company in pursuance of its invitation to place money with it and earn interest. Besides a deposit is unsecured; a loan is almost always secured. Let's also see how the Black's Law Dictionary defines Deposit and Loan:"Deposit means the act of giving money or other property to another who promises to preserve it or to use it and return it in kind; especially the act of placing money in a bank for safety and convenience'"Loan means an act of lending a grant of something for temporary use; a thing lent for the borrower's temporary use; especially, a sum of money lent at interest".The fact that the Black's dictionary hasn't used Deposit and Loan synonymously and has assigned separate definitions to the two terms clearly means the two terms are different and can't be used synonymously. There are scores of case laws where the courts have differentiated between Deposit and Loan. In Gurcharan Das v. Ram Rakha Mal AIR 1937 Lahore 81, the court noted that one of the differences between the two terms was that whereas in case of a deposit it was the duty of the depositor to approach the depositee on the due date of maturity of deposit; in the case of a loan, it was incumbent upon the debtor or the borrower to seek out the creditor or the lender on the due date and settle the loan. The Madhya Pradesh High Court in Sharda Talkies Firm v. Smt. Madhulata Vyas AIR 1996 MP 68 had this to say:[There is a subtle distinction between a deposit and a loan. In the case of a loan, the amount is given by the creditor to the debtor at the request of and for the requirements and dues of the debtor under certain terms and conditions. In the case of a deposit, the depositee receives money at the instance of the depositor. In the case of a deposit, the requirement of the depositee is neither relevant nor material. The depositor has to go to the depositee for depositing the amount or the depositee may go and collect the amount. But in case of a loan, the debtor has to request the creditor to advance certain amount for meeting his requirement for using the amount.]Sometimes it may not be so easy to tell if money standing to someone's credit is a Deposit or a Loan. The Supreme Court laid down the following test in Ram Janki Devi v. Jaggilal Kamalapat AIR 1971 SC 2551:[The case of deposit is something more than a mere loan of money. It will depend on the facts of each case whether the transaction is clothed with the character of a deposit of money. The surrounding circumstances, the relationship and character of the transaction and the manner in which parties treated the transaction will throw light on the true form of the transaction. The documents by themselves are not conclusive evidence to establish whether a transaction is on account of Deposit or Loan]I think the final argument that would clinch the issue is what is known as the Heydon's Rule or the Mischief Rule. What was the position before the provision was introduced? What was the mischief that the law sought to set right? Before clause (d) was introduced on 13th December 2000, the law was that a private company could accept public deposits subject to the restrictions placed by Section 58A. But notwithstanding Section 58A, we had fly-by-night- operator companies accept deposits from gullible people and then vanish into thin air leaving the depositors high and dry. So this was the Mischief. The remedy the law brought was altogether prohibiting the acceptance of deposits by private companies. So clearly it was the interests of the small, unorganized depositors that the law sought to safeguard. A loan is granted after the lender has satisfied himself about the creditworthiness of the company and has also obtained a collateral to fall back upon in case of default. So parties giving out loans to private companies never had their interests in jeopardy, it would appear. Based on the above discussion, in my opinion, a private company can raise loans from members of general public, even if they aren't its members, directors or other relatives.Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, ndpatel2 wrote:>> Dear Friends,> > I think Pvt Co can accept loan from public.> There is thin line difference between loan and deposits. So its for > the company to establish that it has accepted loan and not deposit.> > Pls discuss and enlighten,> Thanks,> CS. Nilesh Patel> +919909900278> > > --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, sdathale > wrote:> >> > in continuation to my earlier reply i have to state that the > articles of private limited company contains 4 clauses viz:> > > > 1) restriction on number of members> > 2) prohibition for any invitation from public to subscribe any > shares> > 3) the right to transfer the shares > > and fourth one : > > 4)Prohibits any invitation or acceptance of deposits from persons > other that its members, directors or their relatives> > > > as such private limited can not borrow from public> > > > s.d.athale> > Mumbai> >

Depreciation On Leased Assets

2008-05-12T21:00:00.000-07:00

Hi Mr Ravi,

You haven't said if it's a Finance Lease or an Operating Lease. AS 19 defines a Finance lease as the one in which substantially all risks and rewards emanating from the ownership of the asset are transferred to the lessee. An Operating lease is defined negatively as the one that isn't a Financial lease—that is in an Operating lease substantially all risks and rewards of ownership aren't passed to the lessee. You need to go through para 8 of AS 19 that lays down tests to determine whether a lease constitutes a finance lease. The first test is: Will the ownership of the leased out assets be transferred to the lessee at the end of the lease term? However I think if the primary test of risks and rewards associated with owning an asset being passed on to the lessee is satisfied in your case, it'd be a finance lease. The lessee in its Balance Sheet recognizes an asset held under finance lease by creating a corresponding liability in respect of future lease rentals. Since your question seems to relate to depreciation under the Income Tax Act, I shall examine this issue from the taxation angle only. In terms of claiming depreciation u/s 32 of the I T Act, there are numerous case laws, decided by the Supreme Court no less, where it's been held that the legal ownership of the asset is not necessary to be eligible to claim depreciation on it. In Mysore Minerals Ltd. v. CIT [1999] 106 Taxman 166 (SC), the Apex court said the following:[Building owned by the assessee the expression as occurring in section 32(1) of the Income-tax Act means that the person who having acquired possession over the building in his own right uses the same for the purposes of the business or profession though a legal title has not been conveyed to him consistently with the requirements of laws such as the Transfer of Property Act, the Registration Act, etc., but nevertheless is entitled to hold the property to the exclusion of all others.]Let's see how the CBDT deals with the issue of depreciation on finance leases. In its Circular No 2/2001 dated February 9, 2001, it says:[1 Under the Income-tax Act in all leasing transactions, the owner of the asset is entitled to depreciation if the same is used in the business, under section 32 of the Income-tax Act. The ownership of the asset is determined by the terms of the contract between the lessor and the lessee.2. [….]3. It has come to the notice of the Board that the New Accounting Standard on `Leases' issued by the Institute of Chartered Accountants of India requires the capitalization of the asset by the lessees in finance lease transaction. By itself, the accounting standard will have no implication on the allowance of depreciation on assets under the provisions of the Income-tax Act."]Clearly the CBDT and the chartered accountants are at loggerheads on this issue. But it seems we have the law on our side. Recently in a decision in Asea Brown Boveri Ltd. v. Industrial Finance Corpn. of India Ltd. [2004] 56 SCL 21/[2006] 154 Taxman 512 (SC), the Supreme Court has endorsed the ICAI's perspective on the treatment of assets being used under a finance lease. I quote below from the judgement:[In our opinion, financial lease is a transaction current in the commercial world, the primary purpose whereof is the financing of the purchase by the financier. The purchase of assets or equipments or machinery is by the borrower. For all practical purposes, the borrower becomes the owner of the property, inasmuch as it is the borrower who chooses the property to be purchased, takes delivery, enjoys the use and occupation of the property, bears the wear and tear, maintains and operates the machinery/equipment , undertakes indemnity and agrees to bear the risk of loss or damage, if any. He is the one who gets the property insured. He remains liable for payment of taxes and other charges and indemnity. He cannot recover from the lessor, any of the above-mentioned expenses. The period of lease extends over and covers the entire life of the property for which it may remain useful, divided either into one term or divided into two terms with a clause for renewal. In either case, the lease is non-cancellable. ]So the final interpreter of the law in India, the Supreme Court, has recognized that a finance lease is nothing but a loan in disguise. The lessee is just a borrower who would have the asset legally transferred in his name after he's paid out all the lease rentals. Actually to call those periodical payouts "rentals" is a misnomer—they're more in the nature of part principal repayments of loan and part interest. Never mind the CBDT in its FBT circular wants the lessee to pay FBT on the entire lease rentals on car!The above decision of the SC was in the context of the Companies Act and not the Income tax law. But that's no reason to brush it under the carpet. But why, we even have Income tax judgements disallowing depreciation to lessors. Since either of two parties has to claim depreciation, by implication, the lessee CAN claim depreciation u/s 32. The Delhi Tribunal in Industrial Finance Corpn. of India v. Dy. CIT [2005] 4 SOT 223 (Delhi), held that:[If the lessor in terms of the agreement provides only the right to use to the lessee during the period of lease, retaining the rights as an `owner' with itself [i.e., operating lease as defined by Notified AS-19], in such a case the lessor would be regarded as the owner for the purposes of claim of depreciation.If the leasing arrangement is a mere financing arrangement, whereby the lessor, in reality is only providing funds for acquisition of the asset and the asset leased out for all intents and purposes, becomes the property of the lessee (i.e., finance lease in terms of Notified AS-19), then in such situation benefit of the depreciation would not be available in the hands of the lessor]Of course in this case the plaintiff, the IFCI, happened to be a financier, which was in the business of financing assets. Still, I think the reasoning can be applied to a situation where the lessor isn't a registered financier, but is in the "business" of leasing out assets. It's difficult to see how the CBDT's circular of February 9, 2001 can be applied to finance leases in the light of the above judgements. As far operating leases are concerned, what the CBDT says doesn't militate against what the judicial forums say. There'd be a whole lot of issues involved in this transaction. What about TDS on lease rent u/s 194-I? If we say not the whole of lease rentals constitute income in the hands of the lessor as they're merely components of principal and interest camouflaged as lease rentals, would the lessee still need to make TDS on the lease rentals? In the ABB decision, the Supreme Court has given explicit recognition to the accounting concept of Substance over Form—-we should look at the substance or essence of the transactions and not merely their form or the legal clothing the parties dress them up in.As we've seen, a finance lease is bristled with legal difficulties right from the word go. If you'd rather not get entangled in all these issues, it's better to define the lease as an Operating lease and let your client, the lessor, claim depreciation on it. Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, selvaganapathy ravichandran wrote:>> Dear Friends,> > One of our client has leased out Land , Building & Machinery etc to another person for the purpose of Carring out Business. The lease rental is Rs. 1 lAKH per Month as lease rental . Who should claim the depriciation Lessor/Lessee?> I persume only the Lessor is entitled to claim the Depriciation . Kindly clarify.> > Regards,> Ravi

C & F Expenses reimbursement - TDS Applicable or Not ?

2008-05-09T22:58:00.000-07:00

Hi Rani,

If you're reimbursing expenses to the C & F agent merely on the basis of a SHEET of expenses, then I am afraid you'd have no choice but to make TDS on those reimbursements. To make out an ironclad defence of your company not being liable to make TDS on those reimbursements, you have to have a solid, documentary proof on record that those payouts made to the C & F agent over and above his commission are really reimbursements— -expenses incurred on behalf of your company—-and they don't constitute his trading receipts. The charging section—-Section 4—-of the Income tax Act says in its sub-section 2:[(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act]So clearly, tax is to be deducted only on the income comprised in a payment. Since reimbursements do not constitute trading receipts or income of the C & F agent, we need not make any TDS on them. This is despite the fact that Section 194C talks about TDS being made on "any sum" paid to a resident in pursuance of a contract. "Any sum" can't be stretched to mean even expenses incurred on behalf of client and later recovered from it. But actually the Income tax department has got its trump card in the shape of the decision of the Supreme Court in Associated Cement Co. Ltd. v. CIT [1993] 201 ITR 435/67 Taxman 346. However facts in this case seem to be very different and can't be extrapolated into a contract a company enters into with a C & F agent. In the Associated Cement case, the contract was a works contract involving labour. The company reimbursed additional labour charges to the contractor in pursuance of an escalation clause in the Agreement. The court held, and rightly so in my opinion, that TDS need be made on it. This was because the enhanced payment on account of additional labour charges had a direct nexus with the original works contract. As such, it constituted revenue receipt of the contractor, liable to be taxed u/s 4(1) and subject to TDS u/s 194C.But when a C & F agent incurs expenses like the custom duty, port dues and sundry other charges, he's merely acting as a frontman of the company. These expenses have no nexus with the commission he is supposed to get for his work. The bills produced by him bear the name of the consignor company. A bill or a receipt backs up each of the reimbursements he seeks. So in a way we can say that the C & F agent doesn't incur these expenses on behalf of the company; rather it's the company that incurs these expenses through him. The decision of the SC in Transmission Corporation of AP Ltd. v. CIT [1999] 239 ITR 587/105 Taxman 742 is an instructive one in this regard and one that can blow a hole in the department's over-reliance on the Associated Cements case. It was in relation to TDS on a non-resident payment, but the principle will apply to Section 194C payments as well. The court laid down the following rules:[1) Any such payment must constitute a trading receipt of the recipient; and2) Such receipt may bear the character of income either wholly or partially including when only a fraction of such payment may constitute income of the recipient and in either case it would call for deduction at source.]We know that the reimbursements in no way constitute trading receipt of the C & F agent. Here, it is also worthwhile to discuss how the ICAI defines "gross receipts" of business in terms of what is to be included and what is to excluded. Para 5.11 of the Guidance Note on Tax Audit says that in case of a clearing agent, "reimbursement of customs duty and other charges collected by a clearing agent" would not form part of his gross receipts in business. The second rule says that even when a receipt partially bears the character of income, it'd be subject to TDS. Clearly this means a case where the contractor incurs an expense, inflates it and claims it in the form of his charges/fee. But when the agent docilely submits the actual bills and seeks no more from the company than what's he's paid himself, it would be stretching the imagination a bit too far to argue that such reimbursements too are subject to TDS since they constitute his income. In the light of the above discussion, I think it's fair to conclude that reimbursements made to C & F agents aren't liable to TDS. But Rani, ask your C & F guy to produce each and every shred of paper he's got in support of those expenses he's incurred. If a sheet of paper is all he's got, then you'd better make TDS on the entire amount paid to him. The onus of proving that those expenses are reimbursements lies on him.Thanks,CA Sanjeev Bedi> > > > Â We are Limited company having a Turnover of Rs. 105 Crore.> Â > Â I have a qurery regarding the applicability of TDS on reimbursement of Expneses to our C & F Agent.> Â > Noramally We pay the commission to C & F agent on the basis of % of sales made by the C & F AgentÂ and on such commission we will deducted the TDS> Â We also reimburse the Expenses to the C & F Agent on montly basis on submission of sheet of expnses paid by him on behalf of the company.> Â > Total C & F expenses approx Rs. 50 lacs> Â > Whether we have to deduct TDS or Not ?> Â > if any case law then please forward me so we can clarify the matter> Â > its so urgent> Â > Thanks in advance> Â > Â CA Rani> Ahmedabad> Â > Hv a nice day

More on STT--Sections 88E, 40a(ib) and 145A

2008-05-09T08:18:00.000-07:00

Hi Mr Dhruv,

I think your original query—-the determination of quantum of STT to be claimed as rebate u/s 88E—-has been addressed. We've strayed into Section 145A, Section 40a(ib), the accounting treatment of STT and the allocation of expenses between speculative and non-speculative gains. But never mind! I understand that impact of STT on profits gets neutralized to the extent of securities held at the end of the year and included in stocks. But still the point is: we never segregated the STT from the purchases; it was always part of the purchase cost. And hypothetically speaking if all the securities bought during the year had been held at 31st March, the entire STT paid would've formed part of the value of closing stock. The fact that not all securities bought during the year are in stock on 31st March and most of them have been squared up during the year doesn't seem to make a difference to this point. Just as valuing the stocks at market price—which may be below cost--won't make any difference to the fact that we would have included the STT in closing stock if we'd valued the stock at cost. Now if we can legitimately take issue with the STT comprised in the closing stock being disallowed to us u/s 40a(ib), are we then supposed to ascertain and go in for disallowance of the STT attributable only to those purchases that have been squared up during the year, excluding those that are still in stock on 31st March? But Section 40a(ib) simply says STT PAID has to be disallowed without making even a passing reference to Section 145A—-what about the STT included in the closing stock? If we give Section 40a(ib) an overriding status over Section 145A, an assessee may be inflicted with a double disallowance. For instance, I buy shares worth Rs 1 lac paying an STT of Rs 100 on them. Out of these shares those worth Rs 40k are held in stock on 31st March. I value my stock at Rs 40040 in keeping with Section 145A mandate. Out of Rs 100 STT paid on purchases, can I disallow only Rs 60 instead of Rs 100, since I have already inflated my profits with Rs 40? Section 40a(ib) doesn't seem to support this kind of treatment. May be we can't fight against the entire disallowance of Rs 100 considering, as you said, some stocks bought during the year have been sold during the year itself. But I don't see how can the assessee be made to suffer disallowance of STT of Rs 40 in the above example. In my view, the STT to be taken out u/s 40a(ib) ought to be on a sort of Cost-of-Goods- Sold basis.STT paid on Sales is a different ball game altogether. There's no confusion in relation to that. The whole of it will be disallowed. Regarding allocation of expenses between speculative and non-speculative transactions, I think turnover is a valid basis for the allocation.

Thanks,

CA Sanjeev Bedi

--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Dhruv Arora" wrote:>> Dear Sanjeevji> > That was one exaustive reply.> > I do agree that STT becomes profit neutral, but it will be only to the> extent of STT that is included in the Closing Stock as on 31.03.2008.> How about the shares sold during the year? Didn't we include STT in the> purchases when these shares were acquired?> > Further, going by this what accounting treatment do you recommend for STT> paid at the incidence of sale of shares?> > One more issue comes into play, suppose the assessee is also trading on> intra - day basis (speculative) alongwith delivery based trading> (non-speculative) . What will the suitable basis for allocation of various> expenses in regard to speculative and non-speculative transactions? Should> we adopt turn-over as a basis?> > Thanks & Regards> CA Dhruv Arora> Meerut

STT--Sections 88E, 40a(ib) and 145A

2008-05-04T23:42:00.000-07:00

Dear Dhruv,
I am more inclined towards the first opinion—-all STT paid during the year, notwithstanding that some of the securities bought during the year haven't been sold and are held in stock at the end of the year, will be considered for Section 88E rebate. The later part of Section 88E reads thus:[….] a deduction […..] of an amount equal to the securities transaction tax PAID by him in respect of the taxable securities transactions entered into in the course of his business during that previous year:]From the way section 88E is worded, I think we can reasonably conclude that the whole of STT paid during the year is eligible for Section 88E rebate. The Explanation to Section 88E also says that "taxable securities transaction" is to be understood in the manner it is defined under Chapter VII of the Finance Act 2004. And Chapter VII of FA 2004 defines securities transaction to mean a transaction for purchase or sale of an equity share or a derivative on a recognised stock exchange.In such a situation, if the shares bought in a particular year haven't been sold in that year and are sold in a subsequent year, then the STT paid at the time of purchase would lapse. It can't be carried forward to the year of sale to be claimed in the shape of rebate. "Paid during the year" should be interpreted literally—there's no reason to impute any other meaning to it. I also don't agree with the accounting treatment of STT you've described. STT shouldn't be charged to the Capital account straightway just because it is a disallowable expense. It ought to be routed through the P & L account, especially in view of the fact that it is also to be considered in the valuation of stock as mandated by Section 145A. How do you answer the question in Form 3CD relating to compliance with Section 145A? You aren't complying with Section 145A if you never take STT to the P & L a/c. But one wonders how can the STT be disallowed in terms of Section 40a if it's going to form part of the purchases? We never segregated it from the purchases account, and so can't we argue that since it's also been considered in the valuation of stock, it can't be disallowed u/s 40a? The idea of 40a disallowance was to deny a twin-benefit to the assessee—claim of expense as well as a rebate. When you include an item of tax as part of your purchases and also incorporate it in the valuation of stock in hand on 31st March, it becomes profit-neutral. Claiming Section 88E rebate in that case wouldn't result in a twin-benefit. This is despite the fact that you've valued the stock at market value, which is lower than the cost as on 31st March. The three Sections---40a( ib), 88E and 145A—-do create a bit of confusion in the case of a trader in shares. I hope I haven't added to it!

Thanks,

CA Sanjeev Bedi

--- In

ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Dhruv Arora" wrote:>> Dear Sanjeevji> > I really appreciate your response.> > Let me explain my concern a little further.> I had discussed this issue with a couple of colleagues in town and I was> provided with the following two diverse opinions: -> > 1. *STT paid for the purpose of Sec 88E* = Sum Total of STT paid> during F.Y. 2007-08 (whether on purchase or sale), it is quite possible that> the Securities purchased during the year are held as Stock-in-trade, but STT> paid on them is to be considered.> 2. *STT paid for the purpose of Sec 88E* = Sum Total of STT paid on> Securities that are sold during F.Y. 2007-08, it is quite possible that some> of the Securities sold during F.Y. 2007-08 were purchased during F.Y.> 2006-07 but STT paid on such securities has to be considered when computing> rebate u/s 88E for A.Y. 2008-09. Going further any STT paid on Securities> purchased during F.Y. 2007-08 but being held as Stock-in-trade as on> 31.03.2008 is not to be considered.> > Further, when assessee (proprietor, in this case) purchases shares he passes> the following entry, considering Sec. 40(a)(ib):> > Share Purchase A/c Dr.> STT A/c Dr.> To Broker's A/c> > Later on, at year end, he squares up STT A/c by transferring it to> Proprietor's Capital A/c, he doesn't route it through P & L A/c considering> Sec. 40(a)(ib).> > As a result Stock as on 31-Mar-08 is exclusive of STT.> > Though, practically speaking all the traders are calculating stock at market> value as on 31.03.2008, same being lower that cost in almost all the cases I> have come across.> > You are requested to throw some light.> > Thanks & Regards> CA Dhruv Arora> Meerut> > On Thu, May 1, 2008 at 9:59 PM, Sanjeev Bedi > wrote:> > > Hi Dhruv,> > The entire STT PAID on the taxable securities transactions entered> > into during the year is eligible for rebate u/s 88E. The language> > used in Section 88E certainly does not restrict the claim of rebate> > only to the STT paid on those transactions that have been reversed—> > bought and sold—-during the year. Section 40a(ib) would disallow you> > the entire amount of STT, even that attributable to the transactions> > that haven't been squared up during the year. So when it comes to> > allowing rebate u/s 88E, the government can't argue that STT> > attributable to only those securities transactions in respect of> > which both purchase and sale have occurred during the year will be> > allowed as a rebate.> > You will also have to include the STT in the valuation of shares> > lying in stock on 31st March, as mandated by Section 145A.> > Thanks,> > CA Sanjeev Bedi> > --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com,> > "Dhruv Arora"> > wrote:> > >> > > Repected Members of the Group> > >> > > I seek your opinion on the following issue.> > >> > > Mr. A is a trader in Shares, he wishes to avail rebate u/s 88E of> > the Income> > > Tax Act, 1961.> > >> > > Section 88E of the Income Tax Act, 1961 says -> > > That the assessee shall be entitled to a deduction, from the> > amount of> > > Income-Tax on such Income arising from such transactions, to the> > extent of> > > the minimum of the following two amounts: -> > >> > > 1. STT paid by such assessee in respect of taxable *Securities> > > Transactions entered into the course of business during that> > previous year> > > *.> > > 2. Avg, Rate of Income-Tax X Business Income from such> > taxable> > > Securities Transactions> > >> > > As we are aware, STT is payable both at the time of Purchase as> > well as Sale> > > of an Equity Share in a Company when the transaction is entered> > into in a> > > recognised Stock Exchange.> > >> > > Now, my question is while computing (1.) above do we have to> > consider the> > > sum total of *STT paid* (both on Sale or Purchase) *during the> > previous year> > > * or sum total of *STT paid on Shares* (both on Sale or Purchase)> > that were> > > actually *sold during the previous year*.> > >> > > Regards> > > CA. Dhruv Arora> > > Meerut> > >

Service Tax--School Bus Fare

2008-05-02T06:55:00.000-07:00

Hi Pratibha,

The school bus certainly can't be classified as a "tourist vehicle" in terms of Section 65(115) of Chapter V of the FA 1994. To operate a tourist vehicle you've to have a tourist permit under the Motor Vehicles Act 1988. The school bus is most probably a contract carriage. Besides picking up kids from home and dropping them back after school doesn't amount to "planning, scheduling, organizing or arranging tours". The school being an educational institution won't be covered under any other service also. If the school itself owns the school buses, then I don't think any service tax liability can attach to it in relation to the bus fare it charges from the students.

Thanks,

CA Sanjeev Bedi

--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com,
"pratibha_chaudhuri " wrote:>> Respected Sir,> I am a Chartered Accountant practising in Ranchi, Jharkhand. Recently > one of my client D.A.V. School Bariatu has been served with a notice of > service tax + interest + penalty on School bus service . The School has > not charged service tax on bus fares and wants to clarify whether it is > liable to pay so. I came across an article in Times Of India in which > it stated that School bus fares will increase due to service tax but i > am unable to understand under which service head.> Kindly clarify and oblige.> Yours Sincerely.> Pratibha.>

Exemption u/s 54--Dismantling the Old house

2008-04-30T03:51:00.000-07:00

Hi Sanjeev,

I think there shouldn't be any problem in claiming exemption u/s 54 if a new house is constructed after the old one is pulled down. There are a number of case laws laying down that the test of whether a new house u/s 54/54F has been constructed or not is its "habitability"— -merely four walls and a roof would not constitute a house. The expenses incurred in pulling down a dilapidated old structure and putting up a new one on it can't be said to be expenditure on renovation; the assessee would be entitled to exemption u/s 54. Here are a few case laws:If investment had been made to make the house habitable, it could not be presumed that the house was in a habitable condition on the day when it was purchased, and that the amount spent on such investment should also be considered as spent for the purchase of the house, since the concept of `habitability' was inherent in the word `house' - CWT v. K.B. Pradhan [1981] 130 ITR 393 (Ori.).]Relying upon the above decision, the Mumbai Tribunal held that the cost of the new asset purchased should include, apart from the purchase price, the cost of renovating the house so as to make it habitable - Mrs. Sonia Gulati v. ITO [2001] 115 Taxman 232 (Mum.)(Mag.).Where the house purchased was in a state of general disrepair and was hence not in a habitable condition, expenditure incurred by the purchaser on carrying out necessary repairs to make the house habitable was to be treated as investment in the new asset - Mrs. Gulshanbano R. Mukhi v. Joint CIT [2002] 83 ITD 649 (Mum.).In Saleem Fazelbhoy v. Deputy CIT [2006] 9 SOT 601 (Mum.), the Tribunal held that the cost of purchase of a house must include the cost incurred in making the house habitable. However, the Tribunal sounded a note of caution that there was a clear distinction between expenditure incurred on making the house habitable and expenditure on renovation, and that whether the house purchased by the assessee was in a habitable condition or not on the date of purchase would depend on its state and condition on that date.Presuming that the existing structure you want to dismantle is an ancient one, you can certainly construct a new one on it after pulling it down and claim exemption u/s 54 on the cost of construction. Thanks,
CA Sanjeev Bedi

--- In

ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "sanjeev31160" wrote:>> Dear friends,> > Please give your opinions as to claim of exemption u/s 54 of I.T.Act > against construction of a residential house to be built after > demolishing entire existing structure standing upon land purchased two > years ago, with requisite approval from Competent Authority.> > Thanks!> > Regards,> CA SANJEEV GUPTA> MOBILE: 9837261347

SC on TI above Rs 1 Crore--After or Before Section 10A/B deduction?

2008-04-29T06:43:00.000-07:00

Hi Mr Krishnan,

As far as Chapter VI-A deductions are concerned, there's no doubt those are to be excluded to arrive at the figure of Total Income. Section 80A, the opening section of Chapter VI-A says deductions mentioned in Section 80C to 80U are to be made IN computing the total income of the assessee. So clearly, Total Income is arrived at after reducing those deductions from the gross total income. And if that Total Income falls below Rs 1 crore, the company wouldn't be liable to pay surcharge. But I have my misgivings about Section 10A/B deductions. The language used in Section 10A/B is:[Subject to the provisions of this section, a deduction of such profits and gains […….] shall be allowed FROM the total income of the assessee]The use of the preposition FROM in Section 10A/B leaves little room for doubt that these deductions are to be allowed only AFTER the total income has been determined. In other words, what constitutes Total Income for determining threshold of Rs one crore for surcharge purposes would be the figure before we allow Section 10A/B deductions. Until A Y 2001-02, Section 10A/B said that the profit derived by an assessee from an eligible undertaking was not to be included in the total income. But effective from 1st April 2001, they began using the word "deduction". But instead of saying "in computing the total income of the assessee", Section 10A/B speaks of allowing the deduction FROM the total income of the assessee. This means that Sections 10A/B are no longer exemption sections—-income from an industrial undertaking in FTZ/SEZ would very much form part of total income of an assessee, but a deduction would be allowed. It is also worth noting that applicability of provisions of Sections 10A/B is optional—-an assessee may choose not to avail of these deductions by requesting the AO under sub-section 8. This fact may be contrasted with Exemptions or Incomes that do not form part of total income like those listed in Section 10. Exempt incomes are exempt; the assessee doesn't have an option not to avail the exemption. You may argue that Section 10A/B still appears under Chapter III, which is titled "Incomes which do not form part of total income", and so the SEZ/FTZ incomes won't form part of TI at all. But I don't think a Chapter heading holds more water than the text of the Section itself in so far as the interpretation of a statute is concerned. When the section clearly says a deduction would be allowed FROM the total income of the assessee, that clearly means TI has already been calculated before we sit down to working out that deduction. So to me it seems surcharge would be payable if the TI before Section 10A/B deduction is over Rs one crore. Nandri,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "M.K.KRISHNAN" wrote:>> Dear CA.Rajesh Suthar> The surcharge is applicable on the Tax on Total Income after > Exemption under section 10A or 10B and after deduction of Chapter > VIA.> Regards> CA.M.K.Krishnan> Vellore> Tamilnadu> > --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Rajesh Suthar" > wrote:> >> > Respected Members of the Group,> > > > Kindly guide about applicability of Surcharge on income tax:> > > > Is it applicable if Net taxable income is more than 1 crore (after > deduction u/c VIA and section 10A/B) or Net Income is more than > 1 crore (before deduction u/c VIA and section 10A/B).> > > > Best Regards,> > > > CA Rajesh Suthar> >

ICD to Holding Company--Deemed Dividend?Rejoinder

2008-04-27T07:51:00.000-07:00

Hi Mr Agarwal,

Section 2(22)(e) wouldn't be applicable in case the company advancing the money happens to be one in which public are substantially interested. Only private and closely-held public companies. i.e. those that aren't listed at a stock exchange have to take care they don't advance monies to their shareholders having more than 10 per cent holding. Now the point is: Will a subsidiary company be the one in which public are substantially interested if its holding company happens to be a listed company? In terms of item (B) of Section 2(18)(b), I don't think a subsidiary of a listed holding company becomes a company in which public have a substantial interest. To buttress this conclusion, we have a case law viz Madura Coats (P) Ltd [2005] 145 Taxman 366/274 ITR 609 (AAR). In this case the Authority for Advance Rulings held that loan to a holding company of the holding company would not be treated as deemed dividend u/s 2(22)(e). Madura Ltd intended to advance a loan to CFL Ltd. Another company, CHL Ltd, was the holding company of CFL Ltd. Some subsidiaries of CHL Ltd (other than CFL) held shares in Madura Ltd. JPC Ltd, a subsidiary of CFL, held shares in Madura too. The AAR held the advance by Madura Ltd to CFL Ltd as not deemed dividend, one of the grounds being that CFL Ltd wasn't a registered shareholder of Madura Coats (P) Ltd. This case had a very complicated shareholding pattern involving scores of companies. Obviously, nexus between the advance of money and the benefit to the registered shareholder( s) wasn't established beyond any doubt. As such, the AAR ruled in the assessee's favour. But in your case, there's no complication. Money has been advanced to the holding company directly. The fact of holding company being listed wouldn't matter—-holding company having its equity held by public at large doesn't make those members of public acquire a substantial interest in the subsidiary. A private company would become a public company the moment it becomes the subsidiary of a non-private company, whether listed or not. But it'd be only a closely-held public company and not one in which public is interested, even if the holding company is widely-held. So, deemed dividend provisions would have an applicability in your case. As regards the absence of any accumulated profits, of course, there's no question of Section 2(22)(e) getting attracted in that event. But please note that the date of determination of accumulated profits is the date on which the loan was granted. Any accretion to or deletion from the revenue reserves of the company subsequent to the advance of money won't have any impact on the determination of deemed dividend. Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Naresh Agarwal" wrote:>> Dear Sanjeevji> > > > I agree with you, but what about Section 2(18) in respect to the definition> of " company in which public are substantially interested".> > > > Section 2(22)(e) starts with " any payment by a company , not being a> company in which the public are substantially interested". Will the> subsidiary company fall in the above definition , where the holding company> is listed.> > > > Naresh

ICD to Holding Company--Deemed Dividend?

2008-04-25T20:57:00.001-07:00

Hi Nareshji,

Your question is: Is the foregoing of the interest on ICD advanced by the subsidiary to its holding company tantamount to deemed dividend in terms of Section 2(22)(e)? But what about the Inter-Corporate Deposit itself? Wouldn't the principal amount in itself amount to deemed dividend? No matter which corporate terminology you dress up the transaction in, the bottom line is the company has lent money to a shareholder holding more than 10 per cent of its voting power. I think the ICD would be deemed dividend in the hands of the holding company to the extent the subsidiary possesses accumulated profits. Also, I don't think the fact of loan having been given at a time when ABC Ltd didn't have more than 10 per cent stake would keep Section 2(22)(e) at bay. As soon as a borrower comes to hold more than 10% equity in the company, all moneys advanced to her by the company whether prior or post her shareholding would become deemed dividend. I would recommend squaring up the ICD on 31st March 2008 to avoid any trouble with the taxation authorities. Section 2(22)(e) is a stinging nettle—-once you get caught in it, it's very difficult to break free from it. Thanks,CA Sanjeev Bedi --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Naresh Agarwal" wrote:>> Dear All > > > > Please give your views:> > > > XYZ ltd company has given ICD to ABC ltd company in April'07. Now during> the year XYZ company becomes subsidiary of ABC wef Auf'07. Please advise on> the following :> > > > The Holding company do not want to provide for interest as because of> certain internal reasons for which the subsidiary company agrees. Will the> non provision attract Deemed Dividend for the subsidiary company?> > > > If not will it be considered as other deemed income for subsidiary company.>

TDS Liability--Conversion of Partnership to Proprietorship

2008-04-24T20:53:00.000-07:00

Hi Mr Agrawal,

No; the proprietary concern wasn't liable to deduct tax at source for the F Y 2007-08. But it ought to apply for the TAN and comply with other TDS obligations with effect from 1st April 2008. The fact that the proprietary concern spun off from the partnership firm and the business presently being carried on by the Individual has been taken over from a partnership firm with probably one of the partners becoming the proprietor does not change the legal position that the firm and the Individual are two distinct entities, each possessing a separate PAN of its own. TDS sections clearly say that an Individual/HUF would be required to make TDS only if the turnover of THAT INDIVIDUAL/HUF exceeded Rs 40 lacs in the preceding year. And since in your case, the turnover didn't cross that figure in the F Y 2006-07, the proprietary concern can breathe easy at least till 31st March 2008.

Thanks,

CA Sanjeev Bedi

--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, Kaushal&Agrawal sunil wrote:>> > > > Respected Members,> Partnership firm converted in to proprietory concern on 01.04.07. Firm was liable for audit u/s 44AB and also turnover of the proprietory concern is over Rs.40.00 lacs. Query: wheather prop. concern is liable for deduction of TDS on Intt., Comm. etc. paid during the year as the first year of T.O. over Rs.40.00 lacs in the name of Prop.> [194A:Any person65, not being an individual or a Hindu undivided family, who is responsible for paying65 to a resident any income by way of interest other than income 66[by way of interest on securities], shall, at the time of credit of such income to the account of the payee67 or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :> > [Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section] > > Please guide.> Thanks in advance.> > CA Sunil Agrawal > > >

Ceiling on rate of interest on loans paid by Companies

2008-04-23T01:40:00.000-07:00

Hi Saurabh,

In terms of the Company law, there's no restriction as such on the maximum rate of interest a private company can pay on the unsecured loans raised from its members, directors or their relatives, like we have in the Income Tax Act on interest on partners' capital.But from the taxation point of view, trouble will arise when the company diverts funds raised via a high-interest bearing loan to advance money to a sister concern at a very low or nominal rate of interest. If a clear nexus between the money borrowed and the money lent is established, you'll be in for a disallowance of the interest paid by the company on the unsecured loans. So you can pay a reasonable rate of interest. And make sure if the company happens to advance money to any of its sister concerns, it charges an appropriate interest depending upon the composition—interest-bearing and interest-free- -of its own capital. Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, sauranh jain wrote:>> Dear all> I have a query regarding payment of interest by a pvt. ltd. co on unsecured loans.> Is there any limit regarding the maximum rate of interest that a company can pay under the companies act or any limit imposed by RBI.> > Thanks in advance> > Saurabh Jain>

Opening of Prop. Firm by Foreign National

2008-04-22T06:43:00.000-07:00

Hi Amit,

You haven't mentioned if the foreign national would be selling the medical equipment through retail trade or wholesale? Per the RBI's Master Circular on FDI—No 2/2007-08 dated 2nd July 2007 a non-resident non-Indian can invest in a proprietary concern in India as long as the business to be carried on by the concern is not amongst the list of forbidden activities like Retail trading, business of chit funds, agricultural activities, etc. Trading in Medical equipment as such is certainly not prohibited, but he wouldn't be able to carry it out it involves selling across the counter. The government hasn't yet opened Retail sector to the FDI.So I think if your foreign national wants to engage in wholesale trade of medical equipment, he ought to be able to set up a proprietary concern in India. I am assuming of course that the foreigner is not a Paki or a Bangladeshi! Thanks,

CA Sanjeev Bedi

--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "mundhra_amit" wrote:>> Dear members,> > I have a query regarding opening of a Proprietory concern by a foreign > national in india. Whether this is allowed. Whether norms of FDI will > be applicable in this case. The foreign national wants to import goods > i.e. medical equipments to india and sell it locally. Please advice.>

Surcharge on FBT

2008-04-22T02:08:00.000-07:00

Dear Mr Ramakrishna,

I quote below from Chapter II, pertaining to Rates of Tax, of the Finance Bill 2008[Provided also that in respect of any fringe benefits chargeable to tax under section 115WA of the Income-tax Act, income-tax computed under this sub-section shall be increased by a surcharge, for purposes of the Union, calculated—(a) in the case of every association of persons and body of individuals, whether incorporated or not, at the rate of ten per cent of income-tax where the fringe benefits exceed ten lakh rupees;(b) in the case of every firm, artificial juridical person referred to in sub-clause (v) of clause (a) of section 115W of the Income-tax Act, and domestic company, at the rate of ten per cent. of such income-tax;(c) in the case of every company, other than a domestic company, at the rate of two and one-half per cent. of such income-tax.]Although the FA 2007 had exempted firms and companies from paying surcharge if their total income didn't exceed Rs 1 crore, this benefit hadn't been extended to the FBT. The AOPs and BOIs, however, won't pay any Surcharge if the value of their fringe benefit didn't exceed Rs 10 lacs. The government obviously was reluctant to extend the largesse of doing away with SC up to a TI of Rs 1 crore to the fringe benefits of firms/companies as well, because the fringe benefits would cross Rs 1 crore in a very few cases. So irrespective of the value of the fringe benefits provided by them, all firms and companies have to shell out SC on FBT. Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, ramakrishna poosarla wrote:>> Dear CA. Ajay Rajput,> > Surcharge is not a provision of the Income tax Act,> but the Finance Act prescribes various rates for IT> etc., > > I feel that there is no liability to Surcharge.> > EC is applicable on all taxes and hence it is not> disputed.> > CA. Ramakrishna Poosarla>

Change in name of a company

2008-04-21T20:28:00.000-07:00

Monday, April 21, 2008 7:55 AM

Hi Padmapriya,

Since the approval of the Central Government (the ROC) is a sine qua non for a change in the name of the company u/s Section 21 of the Companies Act, the new name of the company will take effect from the date of the fresh certificate of incorporation bearing the new name of the company viz. 25th April. It can never be effective from the date of the passing of special resolution, because what if the new name gets rejected because it is undesirable in terms of Section 20? The company is also supposed to adduce sufficient reasons for its decision to seek a change in its name. So obviously, only after the ROC has had a chance to look at the company's proposal for name change can the company be rechristened.So beyond 25th April, the transactions undertaken in the old name will be void. The date of the EGM, 15th April, doesn't matter in terms of the validity of transactions— -the EGM was just an internal procedure of the company. Transactions undertaken between 15th and 25th April will have been in the old name only. The company can't have started acting in its new name until it heard from the ROC.Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, Padmapriya V wrote:>> Dear Friends,> > A closely held Public ltd company, is in the process of changing its name.> > In such a case, the following are the queries,> > EGM is held on 15th April and the new certificate of Incorporation is received on 25th April. > > 1) What is the date of name change? Is it effective from the EGM date?> > 2) If so, what about the transactions entered between those two dates?> > 3) Beyond which date will the transactions undertaken in the old name become void?> > > Regards,> Padmapriya

Disallowance u/s 40a(ia) and Penalty u/s 201--Double Whammy

2008-04-17T08:07:00.001-07:00

Hi Mr Chugh,

Yes, of course, disallowance u/s 40a does not preclude the right of the Income tax authorities to treat a person who's failed to deduct TDS as an assessee in default. Section 40a brought in its wake a double whammy for the assessees—-not only were they liable to be penalized u/s 201(1A) and 271C, but they'd lose the benefit of claim of that expense also. When FA 2004 introduced sub-section (ia) to Section 40a, a lot of experts had decried the move, saying there were already enough safeguards to deter the assessees to shy away from their TDS responsibilities. A disallowance in case of non-deduction of TDS on a payment to a non-resident, who wouldn't be traceable so readily as a resident, was understandable, but subjecting to disallowance even payments made within the country just because the assessee didn't make TDS on them, seemed a bit harsh. But nothing doing. Here's what Section 201 says:[If any such person [….] does not deduct [….], he or it shall, WITHOUT PREJUDICE TO ANY OTHER CONSEQUENCES WHICH HE OR IT MAY INCUR, be deemed to be an assessee in default in respect of the tax]So clearly, launching penalty proceedings against the assessee for non-deduction of TDS doesn't prejudice the department's right to seek a disallowance u/s 40a(ia) and vice versa.But you can save yourself being penalized if you can prove that the deductee (the contractor) had had enough advance tax deposited by him, and so, the revenue wasn't put through a loss because of your client's negligence in deducting and depositing the TDS on the deductee's income. Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "c.p chugh" wrote:>> Dear All,> > Please advise whether the ITO (TDS) is justified issuing penaly notices> for tax not deducted at source on payments which has been otherwise> disallowed u/s 40(i)(a) for Non-deduction of tax at source in regular> assessment proceedings.> > Thanks> > CPChugh> > On 4/16/08, ajay rajput wrote:> >> >> > Dear Friends,> >> >> >> > Please let me know about your opinion as to whether the medical> > expenditure incurred by the employer for treatment of employees in an> > approved hospitals is liable to FBT..?> >> >> >> > as the Circular doest not deals with this aspect..it says only about> > expenses reimburesed upto 15000.> >> >> >> > Thanks !> > *With Regards> > *> > *CA AJAY RAJPUT*> > *New Delhi*> >> > ca.ajayrajput@ ...

Personal Loan for house renovation

2008-04-17T07:29:00.000-07:00

Hi Navneet,

You won't be able to claim deduction u/s 80C on the repayment of personal loan taken by you from the bank even if you've utilized it to construct your house. Section 80C deduction in respect of repayment of principal of housing loan can be claimed only if the loan is raised from specified entities listed in there. Not only are you supposed to have obtained the loan from a specified source, but the end-use also should have been restricted. A personal loan by its very nature doesn't have any end-use restriction. So you can't knock off the principal component comprised in the EMIs discharged during the year from your Gross Total Income u/s 80C. You are not entitled to claim Section 80C on another count—-you've renovated your house and haven't "constructed" it. However, Section 24(b), relating to interest on money borrowed to construct, renovate or repair a house, doesn't bar the assessee to raise loan from any source of his choice—you can borrow money from your Mummy, Daddy or Girlfriend, whoever lends you more easily. The rate of interest has to be reasonable, comparable to say what the SBI would charge. Also make sure you don't repay the loan, especially if it's from a relative or an acquaintance, otherwise than through an account payee cheque or a DD. You'd need to obtain a certificate from the lender for the interest paid/payable during the financial year. Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "navneetkumargupta_ ca" wrote:>> Dear friends> > Please help in one of the query. I have taken a personal loan and > utilised the funds in the renovation of the house. Can i take claim the > interest as expenses in house property income. What are the documentary > proof required for the same for the return.> > Navneet Gupta

TDS on Satellite rights & Video rights of feature films

2008-04-17T07:04:00.000-07:00

Hi Mr Damodhar,

I think your client would need to make TDS when it buys satellite rights from the film producers. Subsequently the Television companies when they make payment to your client for getting the right to broadcast those films/programmes would be required to make TDS too. In the first instance, I feel Section 194J is attracted, as what your client pays to the film producers seems to be Royalty. The meaning of royalty for the purposes of Section 194J is to be the one discussed in Explanation 2 to clause (vi) of sub-section (1) of Section 9:[Explanation 2.—For the purposes of this clause, "royalty" means consideration [….] for:(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films]So your client would need to make TDS u/s 194J @ 10 per cent (plus SC and EC) on the payments made towards purchase of satellite rights. As regards the TV companies. I think they'd be required to deduct tax at source too but not u/s 194J. Section 194C seems to be more appropriate in their case. What the TV companies pay to your client is on account of subscription for obtaining telecast signals; they don't it appears buy the satellite rights as such from your client. But I am not sure. Are the telecast rights sold to TV channels for their exclusive use? Do the particular TV networks that buy those rights monopolize them in the sense that no other TV channel can broadcast those programs? If the answer is yes, then I think TDS will be made u/s 194J as the payment is towards purchase of rights and not execution of a work as envisaged in point (b) of Explanation III to Section 194C.Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "dmrasoc" wrote:>> > Dear all> > can you clarify me. one of our cilent is doing the business of buying > the satillite rights from the film producers and the same rights was > sold to the TV companies frequently. In this regard any TDS is to be > deducted by my client and the TV company respectly.> > > with regards > Damodhar

Reassessment u/s 147 when Assessee is in Appeal

2008-04-16T20:25:00.000-07:00

Hi Mr Choksi,

Thanks for your post. The Bombay High Court did say in Metro Auto Corporation case that the AO couldn't issue notice for reassessment when an appeal in respect of original assessment was pending with an appellate authority. But Finance Bill 2008 has blunted this judgement by introducing second proviso to Section 147:[Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matter of any appeal, reference or revision, which is chargeable to tax and has escaped assessment"]Clearly, 1st April 2008 onwards, the AO will be well within his right to start reassessment proceedings even whilst the assessee is in appeal against the AO's order in the original assessment. Of course the matters in respect of which he wants to reopen assessment shouldn't be the ones that the assessee has gone into appeal for.Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Kunjan Choksi" wrote:>> I donot concur with the views fully. Please refer the decision of Bombay> High Court in the case of Metro Auto Corporation v. ITO (2006) 286 ITR 618> (Bom), where reassessment was held impermissible, when an assessment is> pending in appeal before the Tribunal.> > On 16/04/2008, Sanjeev Bedi wrote:> >> > Hi Vishal,> >> > Yes, the AO can issue a reassessment notice u/s 148 for the same> > assessment year even though appeal with the Tribunal against the> > order of the CIT (A) is pending.> >> > The AO retains his power to invoke Section 147 within 4 years of the> > end of the relevant assessment year for which he has passed his> > order u/s 143(3). In your case, the AO has already passed the order> > u/s 143(3). He could have suspected an item of income escaping> > assessment even in later years up until the 4th year and reopened> > the assessment. His right to reassess the assessee's income starts> > the moment the assessment u/s 143(3) has been completed at HIS end.> > The fact that the assessee has gone into appeal does not deter the> > AO to exercise his jurisdiction u/s 147/148 if he suspects some> > income playing truant.> >> > Reassessment proceedings can't be initiated whilst the assessment> > proceedings are pending. By "assessment proceedings" we mean the> > assessment proceedings at the AO's end; the CIT (A) and the Tribunal> > aren't assessing authorities.> >> > So the AO is within his right to reassess your client's income even> > whilst you're in appeal provided of course he satisfies the litmus> > test of having sufficient "reason to believe".> >> > Thanks,> >> > CA Sanjeev Bedi> >> > --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com,> > "CA Vishal Gupta"> > wrote:> > >> > > Dear Members,> > >> > > in one of my case, assessment order was passed by ITO U/s 143 (3),> > against which an appeal was filed before CIT (A), from where part> > relief was granted. Further an appeal was moved to ITAT for the> > balance addition in the original assessment order. meanwhile during> > this a notice under section 148 was received by the assessee to> > reassess the income of the assessee on some reasons. i want to know> > whether he can issue a notice U/s 148 for the same assessment year> > while the appeal against the original order U/s 143 (3) for the same> > year was pending.> > >> > > CA. Vishal Gupta

Validity of notice u/s 148

2008-04-16T03:03:00.000-07:00

Hi Vishal,

Yes, the AO can issue a reassessment notice u/s 148 for the same assessment year even though appeal with the Tribunal against the order of the CIT (A) is pending. The AO retains his power to invoke Section 147 within 4 years of the end of the relevant assessment year for which he has passed his order u/s 143(3). In your case, the AO has already passed the order u/s 143(3). He could have suspected an item of income escaping assessment even in later years up until the 4th year and reopened the assessment. His right to reassess the assessee's income starts the moment the assessment u/s 143(3) has been completed at HIS end. The fact that the assessee has gone into appeal does not deter the AO to exercise his jurisdiction u/s 147/148 if he suspects some income playing truant. Reassessment proceedings can't be initiated whilst the assessment proceedings are pending. By "assessment proceedings" we mean the assessment proceedings at the AO's end; the CIT (A) and the Tribunal aren't assessing authorities. So the AO is within his right to reassess your client's income even whilst you're in appeal provided of course he satisfies the litmus test of having sufficient "reason to believe".Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "CA Vishal Gupta" wrote:>> Dear Members,> > in one of my case, assessment order was passed by ITO U/s 143 (3), against which an appeal was filed before CIT (A), from where part relief was granted. Further an appeal was moved to ITAT for the balance addition in the original assessment order. meanwhile during this a notice under section 148 was received by the assessee to reassess the income of the assessee on some reasons. i want to know whether he can issue a notice U/s 148 for the same assessment year while the appeal against the original order U/s 143 (3) for the same year was pending.> > CA. Vishal Gupta

Interest on Capital--Funds invested in House Property

2008-04-15T09:00:00.000-07:00

Hi Gurdev,

You are right—the AO is erring in law by insisting on disallowance of interest on capital to the extent the capital is invested in the building rental income from which is assessable under the head Income from House Property. Section 40(b) allows the claim of deduction of interest on capital and other forms of remuneration to partners out of income chargeable under the head Business and Profession only. If after reducing income from HP from the firm's book profits, there were no business income left, there'd be no allowance u/s 40(b). But the AO can not interpret the concept of calculation of book profits to mean that the portion of partners' capital invested in non-business assets has to be excluded to determine the figure on which 12% rate will be applied. The law has already taken care what the AO is uneasy about—any stream of income, unless it emanates from the B/P source, will not be eligible to be given the benefit of Section 40(b) allowance. By not contesting, and agreeing to its rental income being assessed as HP income, the firm has already denied itself the benefit of setting off partner's remuneration including interest on capital against the rental income. The interest on capital, although calculated with reference to the capital outstanding to the partners' credit, is also subject to the availability of business profits. The firm gets to claim amount allowable u/s 40(b) because it is offering sufficient income chargeable under the head B/P. Taking twelve per cent of the figure of capital is only a mode of distribution of business profits amongst partners. The interest on capital too could well have been allowable on the basis of slabs of book profits as is the case with remuneration to partners. The fact that it isn't and is calculated with reference to the quantum of capital does not take away from the fact that it's a charge against business profits and not any other income. The AO it appears feels it's a diversion of funds from business to other uses, like granting interest free loans to a sister concern. But the point is interest from loan--had it been received--would' ve been chargeable to tax under B/P head and hence part of book profits. But rental income is already outside the purview of book profits u/s 40(b).I think you ought to be able to persuade the AO to drop the idea of disallowance of the interest on capital.Regarding payment of interest on capital, please note that interest is not remuneration u/s 40(b). Therefore, it can be paid even in the case of a book loss. Remuneration— -salary, bonus, commission, etc--can be paid only to working partners; interest on capital on the other hand can be paid even to a sleeping partner. Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "garrysingh2001" wrote:>> A Partnership firm owns a building constructed out of capital > invested by the partners to the tune of 20 lakhs in the year > 1981.The interest on capital has duly been allowed out of the income > of the firm which includes rental income of the building apart from > business income on account of lease of assets such as generators, > lifts etc and maintenance income. However the IT department chose to > assess the rental income as Income from House property to which the > assessee has accepted. Since one set of books of accounts are > maintained, the firm makes the computation of income as under-> > Business Head> Net profit As per P&L account> less: Rental income to be considered separately> Add: Municipal Taxes debited to P&L to be considered > separately XXXXXX> > House Property> Rental Income> Less: Municipal Taxes> Less:Deduction u/s 24> XXXXXX> The said method has been followed for years at length and accepted > by the department even in cases u/s 143(3). Now during the current > year, the AO wants to disallow Interest on capital on 20 Lakhs out > of the business Income. His Claim is: Since out of the total capital > 20 Lakhs is invested in Building, income from which is being > assessed under House Property, Interest to that extent on 20 Lakhs > cannot be allowed as a business expenditure.> My Claim is : Since this is a case of a partnership firm, and there > is no doubt to the total capital invested by the partners, section > 40 does not bar the assessee to give interest to it's partners upto > a maximum of 12% and as such the AO is erred in disallowing the > interest on capital claimed out of business income> Friends, please guide me on the said issue and assist with rulings > in favour of the assessee.Also please let me know, if interest on > capital can be given in case of Book loss. Thanks.regards CA Gurdev > Bly>

TDS on Payment to Travel Agent

2008-04-09T08:14:00.000-07:00

Hi Uttam,

The company that buys the air tickets doesn't have a principal-agent relationship with the travel agent. The travel agent is the agent of the Airlines and not of the customer. The Airlines pays him commission on the volume of tickets he sells and deducts TDS on it u/s 194H. The company is merely a customer, who instead of buying the tickets directly from the Airlines, buys them from the agent, who may also allow some discount on the price of tickets to create an incentive for the travelers to book the tickets through him only. "Handing charges" that the agent is charging seems like a camouflage to inflate the bill for tickets. You're doing a favour to the agent by buying the tickets through him. Charging handling fee makes sense for some agency or a tout that runs company's errands like buying tickets, booking hotels for visitors, etc. The Airline-appointed travel agent didn't have to stand in a queue to buy the tickets! So I don't know what lies beneath the misnomer of Handling Charges.Thanks,CA Sanjeev Bedi--- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, UTTAM SHARMA wrote:>> Learned Members,> > If a company purchases Air/Train Tickets through a Travel Agent, is the company liable to deduct tax on payment made to Travel Agent u/s 194 C.> > Amount of payment exceeds Rs 20000.> > Travel Agent is charging handling charges on cost of Tickets.> > Pls give your valuable opinion. > > CA Uttam Sharma

Section 15 and Section 192 (TDS on Salary)--At Odds?

2008-04-08T08:07:00.001-07:00

Hi Ajay, Ramji and Mahendraji,

On a cursory glance at Section 192, it does seem that TDS on gratuity that became due on 31st March 2008 and was credited to the employee on that day, would become liable to be deducted only when the gratuity cheque is written out to the employee. This is because unlike all other sections requiring deduction of tax at source, Section 192 doesn't talk about liability for making TDS at the time of credit or payment whichever is earlier. A reason why Section 192 is worded this way could be because of payments like Commission to Directors. The companies' accounts are prepared as late as September; and the commission, which is calculated as a percentage of the profits of the company, can be known only after profits have been determined. The companies calculate the commission and provide for it on 31st March. Now TDS return in respect of salaries and the due date of deposit of TDS have already gone past long before the Balance Sheet of the company is finalized. So there is no way the company can be made liable to make TDS on Director's commission just because it makes the entry on 31st March. The company deducts TDS in the current year at the time of making the payment. The company is supposed to provide for the commission on 31st March itself, although it becomes "due" in the employee's hands only in the current year. Section 15 says that salary becomes taxable in the employee's hands the moment it falls due, no matter which year has it been received in. So when the employee gets the right to receive gratuity vested in him on 31st March 2008, it is beyond any doubt that that gratuity is taxable in his hands in A Y 2008-09. Section 192 calls for tax deduction at the time of payment, it also speaks of the "RATES IN FORCE FOR THE FINANCIAL YEAR IN WHICH THE PAYMENT IS MADE, ON THE ESTIMATED INCOME OF THE ASSESSEE UNDER THIS HEAD FOR THAT FINANCIAL YEAR."There does appear to be a contradiction between Section 15 and Section 192. I do wish that Section 192 could have been more unambiguously worded. The estimated income obviously means the income for the financial year in which the employee rendered services. But the section says TDS is to be made by using the rates in force for the financial year in which the payment is made. When the gratuity is taxable in the employee's hands in A Y 2008-09, how can the employer apply the rates in force for A Y 2009-10 upon releasing the gratuity in April 2008? The rates in force mentioned in Section 192 cannot be interpreted any other than those on which the employee is assessable u/s 15. And in respect of gratuity becoming due on 31st March 2008, the rates will be those of the A Y 2008-09. I think we need not treat gratuity any different from the salary paid ordinarily from month to month. To me it seems TDS need be deducted only on the occasion of actual payment of gratuity and not 31st March. This is despite the fact that gratuity in the case at hand is quite unlike the director's Commission—-gratuity liability did get crystallized on 31st March itself unlike the commission liability. But then routine monthly salary got crystallized on 31st March too; but we don't say TDS on that should've been deducted on 31st March itself. This viewpoint is also supported by at least one case law.In the case of Y S C Babu Vs Chairman & MD, Syndicate Bank [2002] 120 TAXMAN 88 (AP) it was held that "sub-Chapter (B) of Chapter XVII contains provisions of sections 192 to 206B of the Act dealing with deduction of tax at source in different situations contemplated thereunder. What is deductible at source is only the tax at the rate applicable on the amount, which is actually fallen due and is paid. Only in a case where a salary accrued to an employee and THE SAME IS PAID, the employer can deduct tax at source under section 192 AND NOT OTHERWISE. In other words, accrual as well as payment of salary should co-exist in order to attract the provisions of section 192."We also need to delink the taxability of salary in the employee's hands from the employer's liability to make TDS on it. Under Section 15, any item of salary will become taxable as soon as it becomes due. But this state of affairs can not be extended to Section 192—the legislature has used the words `at the time of payment" in that section willfully and not loosely. And the liability for TDS on salary cannot on a mere credit entry in the books. There has to be a payment. So I think TDS on gratuity booked on 31st March 2008 but paid in April 2008 will be made only in April. Thanks,CA Sanjeev Bedi --- In

ICAI_CIRC_MEERUT_ CA@yahoogroups. com, MAHENDRA PRAJAPATI wrote:>> Dear Ajay Rajput,> > I admit that I have missed the word in Bold and you are absolutely correct.But I have one thought i.e. what salary chapter says. Salary will be taxable on due or receipt basis whichever is earlier. And the moment on which it becomes taxable tax has to be deducted on it.Here employer has to deduct tax. I am not at all saying that you are wrong. Refering to Section 192, you are right. But don't you think that this is contracdictory.> > As during the year 2007-08, something becomes taxable on due basis & tax will be deducted on it.> So I request you to pls.give your opinion as to my thought.> > I will wait for reply.> > Thanks,> > Mahendra> > > ajay rajput wrote:> > Dear Mahendra Ji,> > Please go through with Section 192 its is being reproduced hereunder for your ready reference...> > Salary.> 192. (1) Any person responsible for paying any income chargeable under the head â€œSalariesâ€ shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.> > > I think you have missed the words in bold..> > > With Regards > > CA AJAY RAJPUT > New Delhi

*SANJEEV BEDI SAYS SO*ICAI_MEERUT_CA

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SANJEEV BEDI SAYS SOICAI_MEERUT_CA