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.>

Exemption u/s 54--Dismantling the Old house

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?

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

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?

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

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

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

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

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

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

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

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

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

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

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

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

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?

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 “Salaries” 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

Salary Grossing-up

Hi Mr Ravi,Okay,

I see now! In the case of Western Geo International Ltd. V. Asstt. CIT, [2007] 16 SOT 459 (Delhi), it's been held that in a case where the employee is paid tax-free salary (tax-free in the sense that the employer bears the tax), the taxable salary in the hands of the employee is determined after grossing up the salary with the taxes borne by the employer. The employee will get what she wants and the employer too can keep from running afoul of the law. This method of shifting the tax burden is also recognized by Section 195A of the I T Act. Now this tax on salary borne by the employer is squarely covered by Section 17(2)(iv—-employee' s obligation met by the employer. So without a doubt it'd be a perquisite in the employee's hands and liable to tax. So the employer will once again have to calculate tax on tax and deposit it. This iterative process will go on till the tax amount becomes negligible! Obviously, this isn't a very good idea to go about this thing. What the employer should do is work back from the figure of net outgo he's agreed to pay to the employee, and arrive at the figure of salary, which he will book as an expense. The entire grossed-up salary can be claimed as an expense and there'd be no disallowance u/s 40a. This will give the impression of the employee having had tax on her income deducted at source. But actually, she got what she wanted. And in addition, she got a Tax-Credit certificate for free! It may be noted that Section 10(10CC) won't be attracted since taxes are monetary payments. Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_ CA@yahoogroups. com, selvaganapathy ravichandran wrote:>> Dear sanjeev,> > My understanding of Mr. Kunjan,querry is that the Salary paid is not Tax free but only the tax portion is borne by the company. Whether the tax paid by the co is treated as perqusite in the hands of the employee and the tax is calculated on that also.> > thank you> Ravi> > Sanjeev Bedi wrote:> Hi Kunjan,> > No company can pay tax-free salaries to any of its employees—whether > directors or other officers. Section 200 of the Companies Act > forbids that:> > [Prohibition of tax-free payments:> > 200. (1) No company shall pay to any officer or employee thereof, > whether in his capacity as such or otherwise, remuneration free of > any tax, or otherwise calculated by reference to, or varying with, > any tax payable by him, or the rate or standard rate of any such > tax, or the amount thereof.]> > As such, there's no idea reaching for a calculator and working out > the figures.> > Thanks,> > CA Sanjeev Bedi> > --- In ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Kunjan Choksi" > wrote:> >> > Dear Members> > > > In case of a company where the salary to director is paid > exclusive of> > taxes. Say Rs 5 Lac p.m and the taxes are to be borne by the > company.> > > > What is the total income & the total tax liability. Could any > member please> > illustrate.

Tax-free Salaries to Corporate employees

Hi Kunjan,

No company can pay tax-free salaries to any of its employees—whether directors or other officers. Section 200 of the Companies Act forbids that:[Prohibition of tax-free payments:200. (1) No company shall pay to any officer or employee thereof, whether in his capacity as such or otherwise, remuneration free of any tax, or otherwise calculated by reference to, or varying with, any tax payable by him, or the rate or standard rate of any such tax, or the amount thereof.]As such, there's no idea reaching for a calculator and working out the figures.Thanks,CA Sanjeev Bedi--- In

ICAI_CIRC_MEERUT_ CA@yahoogroups. com, "Kunjan Choksi" wrote:>> Dear Members> > In case of a company where the salary to director is paid exclusive of> taxes. Say Rs 5 Lac p.m and the taxes are to be borne by the company.> > What is the total income & the total tax liability. Could any member please> illustrate.>