No Ownership of Asset--No Allowance of expenses?

Hi Mr A K Singh,

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

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

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

Hi Jagdeesan and Anoop,

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

TDS on foreign artists in India

Hi Naresh,

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

Excess Deposit of TDS--The Remedy

Hi Subodh,

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

Mr Capital Asset--How old are you?

Hi Mr Madhu and everyone,

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

Going Concern going downhill

Hi Syam,

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

Going Concern going downhill

Hi Syam,

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

Query on Private trust

Hi Anoop,

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

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

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

Thanks,

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

Service Tax refund to exporters

Hi Rajeev,

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

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

More on Share Warrants, Share Certificates and Capital gains

Dear Pramodji,

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

Of Share Warrants, Share Certificates and Capital gains

Hi MKK,

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

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

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

Dear Pradeep,

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

TDS on audit fee

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>