TDS on audit fee

Dear Mr Guru Prasad,

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

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

Dear Sandeep,

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

TDS on Audit fee

Hi Pardeep Ji,

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

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

Hi Ravi,

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

TDS on Fee to University in the UK

Hi Anoop,

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

Trust for benefit of Minor 2

Hi Madhu,

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

Trust for benefit of Minor

Hi Pravin and Anoop,

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

FBT and disallowance u/s 40A(9)

Hi Mr Devarajan,

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

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

TDS on freight paid on seller's behalf

Hi Mr Sharvari,

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

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

Is interest u/s 234 B/C applicable?

Hi Ramji,

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

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

More on Interest u/s 234C

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

Hi Mr Devarajan,

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

Claiming STT rebate against MAT

Hi Mr Gala,

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

Receipt of Share Application money in Cash and Section 269SS

Hi SanJosh, Deepakji and everyone,

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

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

Hi Mr Kalra,

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

TAX AUDIT OF CO-OPERATIVE SOCIETY

Dear Mr Agrawal,

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

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

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

Hello Amreshji and Mr Parmar,

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

: Lineal Ascendant/Descendant and Manu Bhajji

Dearest Balu,

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

TDS on Hostel--Boarding and Lodging

Hi Ganesh,

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

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

Hi Purnima,

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

Disallowance of Bonus u/s 43B

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

CA Sanjeev Bedi

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