FBT on car insurance

Hi Rahul,

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

Taxability of Notice Pay

Hi Dhruv,

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

Provision for Gratuity--Nine is the Number

Hi Lalita,

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

Arrears of Freedom Fighter Pension-Relief u/s 89

Hi Balu,

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

Exemption u/s 54--Investment in Two houses

Hi Brijesh,

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

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

Hi Anuj,

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

Thanks,>

CA Sanjeev Bedi> >

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

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

Hi Piyush,> >

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

Thanks,> >

CA Sanjeev Bedi > > ---

Dear All,> >

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

AGM of a private company---Shareholders Abroad

Hi Vishal,

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

Thanks,

CA Sanjeev Bedi

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

Depreciation Cos. Act--Minimum Rates

Hi Josh,

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

Thanks,

CA Sanjeev Bedi---

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

Dear Members> >

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

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

Hi Mr Tejasvi,

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

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

Hi Abhishek,

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

Disallownace of Bonus U/s 43B

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.>