Disallownace of Bonus U/s 43B

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

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

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?

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

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 ?

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> > > >  We are Limited company having a Turnover of Rs. 105 Crore.>  >  I have a qurery regarding the applicability of TDS on reimbursement of Expneses to our C & F Agent.>  > Noramally We pay the commission to C & F agent on the basis of % of sales made by the C & F Agent and on such commission we will deducted the TDS>  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.>  > Total C & F expenses approx Rs. 50 lacs>  > Whether we have to deduct TDS or Not ?>  > if any case law then please forward me so we can clarify the matter>  > its so urgent>  > Thanks in advance>  >  CA Rani> Ahmedabad>  > Hv a nice day

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

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

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

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.>