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V. K. Subramani

NARAYAN sold uprooted teak trees for Rs 50,000. Assuming that he wants to do some cultivation after uprooting the teak trees decide the taxability.

b) Thakur received Rs 1,00,000 in April 1999 as advance for the proposed sale of his residential house situated at Chennai. The house was acquired in April 1981 for Rs 2,00,000. The sale was, however, effected in June 2000 for Rs 10 lakhs. Decide the lia bility for the year ended March 31, 2000.

Cost inflation indices are 1980-81:100, and 1999-2000: 389.

c) Chandok, a general manager of Top Tea Ltd, refused to take salary from January to March 2000 of Rs 60,000 on the ground that, by taking the entire arrear salary in April 2000, he can postpone tax liability to next year (that is, accounting year 2000-2 001). Advise.

Solution: a) Where trees are cut completely alongwith roots, the sale value is a capital receipt as the income generation would cease after uprooting the trees. The receipt would be capital receipt received in lieu of source of income. However, it is tax able as capital gain (78 ITR 58).

b) The transfer was effected only in June 2000 and during the previous year 1999-2000 the assessee received only advance money. which will not result in any tax liability. Therefore, there will be no tax implication because of the transaction.

c) Salary received or due, whichever is earlier, will be taken for deciding the tax liability. By mere postponement of a receipt, a tax liability cannot be deferred. Though Chandok has not taken salary it will be included in his total income and tax will be chargeable on such income. For salary and house property incomes, the assessee has to offer them on accrual basis and it cannot be offered for taxation by adopting cash basis of accounting.

Gold capital

BALAN, who started Bala Jewellery in April 1999, contributed 100 sovereigns of gold ornaments as his capital contribution in May 1999. The ornaments were acquired by him in June 1980 for Rs 90,000. The capital account of Balan was credited with Rs 4 lakh (fair market value, Rs 3.80 lakh).

The concern sold 50 sovereigns only till March 2000 for Rs 2.10 lakh. Decide the tax liability.

Solution: Section 42(2) says that where an assessee converts a capital asset into stock-in-trade of a business, then the fair market value on the date of conversion will be taken as the deemed consideration for computing the capital gain.

However, the liability to tax will arise only upon the sale of the said stock-in-trade brought in by conversion of capital asset.

The sale price less proportionate fair market value is taxable as business income (Rs 2.10 lakh minus Rs 1.90 lakh). For ascertaining capital gain, the proportionate fair market value less indexed cost of the asset will be taken. (Rs 1.90 lakh less 1.75 lakh (45,000 x 3.89)). The long-term capital gain would be Rs 15,000.

Soil research

SAROJ Software Ltd paid Rs 2 lakh to Madras University for doing research on soil conservation technics. Decide the allowability of deduction.

Solution: Under Section 35, any sum paid to a university for research, whether related to the assessee's business or not, is eligible for deduction at 125 per cent of the sum paid. The assessee can, therefore, claim Rs 2.50 lakh as deduction for the dona tion given.

One vs the other

DISTINGUISH and decide the taxability of the following:

i) Speculative and hedging transactions.

ii) Tiffin allowance versus food provided to employees during working hours.

iii) Medical allowance versus medical reimbursement.

iv) Vacant site rent receipt versus farm house rent.

v) Medical premium paid on the personal accident policy of the employee by the employer versus medi-claim premium.

vi) Payments for expenditure above Rs 20,000 versus receipt of loan of Rs 20,000 or more.

Solution: i) In speculative transactions, the accounts between the buyer and seller are settled by settling the difference and without actual delivery of goods. Hedging transactions, on the other hand, involve delivery of goods and settlement will take p lace only thereafter.

Loss from speculation cannot be set off against other incomes and can be carried forward for set off only against speculative gains in future years.

Hedging transactions are taken as regular business transactions with no extra privilege or deprivation in the statute.

ii) Fixed tiffen allowance paid by the employer to the employee is a taxable perquisite. However, providing food to employees during working hours will not be a perquisite.

Also, if an employee is paid towards refreshment outside the office premises, then only Rs 35 per day is eligible for exemption subject to the condition that the amount is paid by the employer directly to the caterer, restaurant, eating place, canteen, a nd so on. Even if the sum paid is more than Rs 35 per day, such excess is taxable as a perquisite in the hands of specified employees only.

iii) Fixed medical allowance is chargeable to tax without any concession. Reimbursement of amounts spent by the employee towards medical expenses will, however, be exempt up to a maximum of Rs 15,000 per annum.

iv) Rent received from vacant site is chargeable to tax under the head `income from other sources' and the land owner can claim any tax paid on such land as a deduction against the rental income. Farm house rent is not chargeable to tax if it is occupied by the cultivator for processing or storing the agricultural produce before being taken to the market for sale.

v) Annual premium paid by the employer on the personal accident policy effected by him on his employee is not a chargeable perquisite. Medi-claim insurance premium paid by an assessee by cheque is eligible for deduction under Section 80 D up to a maximum of Rs 10,000. In respect of an HUF with a senior citizen, the quantum of deduction is Rs 15,000 from the assessment year (AY) 2000-2001.

vi) Under Section 40 A(3), when any expenditure in excess of Rs 20,000 is paid otherwise than by crossed cheque, 20 per cent of the sum paid is not to be allowed as an expenditure. However, Rule 6 DD provides the exceptions to Section 40 A(3).

Under Section 269 SS, any loan of Rs 20,000 or more accepted otherwise than by crossed account payee cheque will expose the assessee to penalty of an equivalent sum under Section 271 D of the Act.

TDS omission

A PERSON liable to deduct tax at source omits to do so. What all are the consequences under the I-T Act.

Solution: i) If a person liable to deduct tax at source fails to do so, he will be deemed as an assessee in default and be liable for the following:

i) Interest under Section 201(1A) at 18 per cent on the amount omitted to be deducted up to the date of payment.

ii) Penalty under Section 221 not exceeding the TDS amount.

iii) Penalty under Section 271 C equal to the tax not deducted at source.

iv) Prosecution under Section 276 B for failure to pay the tax deducted at source to the Central Government.

However, penalties and prosecution can be avoided if the assessee, because of reasonable cause, was prevented from complying with the law .

Notional basis

ELABORATE when the written-down value (WDV) of a depreciable asset is taken on notional basis for deciding the depreciation claim.

Solution: In the following instances, the WDV of the asset will be adopted based on notional basis:

a) In case of succession in business/profession, the successor would be eligible for depreciation on the WDV of the asset held by the predecessor (Explanation 1 to Section 43(6)).

b) In case of transfer between holding company and subsidiary company or vice versa, the depreciated value in the assessment record of the transferor company will be adopted in deciding the transferee's depreciation claim (Explanation 2 to Section 43 (6) ).

c) Transfer, in the scheme of amalgamation of companies, would also entitle the amalgamated company to claim depreciation on the WDV of the erstwhile company rather than the transfer price involved in the amalgamation.

d) Demerger of companies would also result in depreciation claim of the resultant company based on the WDV of the demerging companies.

Carry forward

CHANDAN presents you the following information: Unabsorbed depreciation relating to AY 1990-91, Rs 51,000; 1991-92, Rs 40,000; 1992-93, Rs 90,000; 1993-94, Rs 45,000; 1994-95, Rs 50,000; and 1998-99, Rs 50,000. His income for the year ended March 31, 200 0, is, say, Rs 5 lakh.

a) Decide the income after set off of brought-forward depreciation claim.

b) Assuming that the business -- which was carried on till March 31, 1995 -- has been discontinued and a new business started from April 1, 1995, decide the taxable income.

Solution: a) The unabsorbed brought-forward depreciation up to AY 1996-97 will be eligible for set off in eight instalments. Though the assessee has brought-forward depreciation relating to AY 1990-91 onwards, the entire sum will be aggregated for set of f in eight instalments from the AY 1997-98.

The chargeable income will be Rs 1,84,000 after deducting all the unabsorbed brought-forward depreciation.

b) The unabsorbed depreciation relating to discontinued business will not be allowed deduction against other incomes and, hence, the unabsorbed depreciation up to the AY 1995-96 will be ignored. Hence, the chargeable taxable income will be Rs 4.50 lakh.

Tax computation

SAHAJAN presents you the following information: i) commission from LIC agency -- Rs 51,000; ii) rent received from house property at Calcutta let out at Rs 4,000 per month -- Rs 48,000 (the property was, however, gifted by his wife in 1990); iii) bank deposit interest -- Rs 21,000; iv) salary received from X & Co Ltd -- Rs 60,000; v) lottery winning (less TDS of Rs 41,800) net -- Rs 56,000.

Decide the taxable income.

ii) ABC & Co, consisting of three partners (up to March 31, 1999) with equal share, has brought-forward business loss of Rs 6 lakhs. It is informed that the income of the firm for the year ended March 31, 2000, was Rs 10 lakhs and the partner, A, retired from the firm on April 1, 1999. Decide the taxable income of the firm.

Solution: i) When LIC agency commission income is less than Rs 60,000, the assessee can claim ad-hoc deduction. And as the details regarding the first year and renewal commissions are not available, a simple deduction at 15 per cent is available to the a ssessee. The chargeable agency income will be Rs 43,350.

Rent received will be chargeable to tax in the assessment of his wife because of Section 64(iv).

Bank deposit will be chargeable to tax with eligibility of deduction under Section 80 L to the extent of Rs 12,000.

Salary from X & Co Ltd will be chargeable to tax with standard deduction of Rs 20,000.

Lottery winning, being Rs 1 lakh, will be included in the gross total income after a deduction of Rs 5,000 under Section 10(3).

The gross total income would be Rs 1,99,350 and the net income will be Rs 1,87,350 with a TDS credit for lottery income of Rs 41,800.

ii) Under Section 75, where a partner retires from the firm, the loss attributable to his share will be deducted and only the balance can the firm carry forward for set off against its future income. The taxable income of the firm will be reduced by Rs 4 lakh attributable to the continuing partners' share in the brought-forward business loss and, hence, the taxable income will be Rs 6 lakhs.

Short notes

WRITE short notes on any three of the following:

i) Failure to audit under Section 44 AB.

ii) Failure to maintain books of account.

iii) Time limit for completion of assessment under Section 153.

iv) Double taxation relief.

Solution: i) Failure to obtain and file an audit report under Section 44 AB within the time limit prescribed under Section 139(1) would result in levy of penalty under Section 271 B. The quantum of penalty would be 0.50 per cent of the turnover or Rs 1 l akh, whichever is less. However, the assessee, by explaining the reasonable cause for the delay or failure in obtaining the audit report prescribed under Section 44 AB, can escape penalty.

ii) Section 44 AA prescribes the conditions for maintenance/non-maintenance of books of accounts by the assessee. Where an assessee does not fall under the presumptive income scheme -- Section 44 AD, AE or AF -- books of accounts will have to be maintai ned if the turnover exceeds Rs 10 lakh or the income exceeds Rs 1.20 lakh. Specified professionals with gross receipts of over Rs 1.50 lakh are to maintain books of accounts. Failure to do so would result in a minimum penalty of Rs 2,000 and a max imum of Rs 1 lakh.

iii) Section 153 prescribes the time limit for completion of assessments. An assessment under Section 143 or 144 cannot be made after the expiry of two years from the end of the year in which the income is first assessable. In other words, returns up to the AY 1997-98 cannot be assessed under Section 143 or 144 after April 1, 2000.

Similarly, where a notice for assessment has been issued under Section 148, the assessment will have to be completed within two years from the end of the year in which the notice was served. A notice served up to March 31, 1998, will get time barred on A pril 1, 2000.

iv) Section 90 of the I-T Act provides for tax relief in respect of incomes earned by an assessee and for which he has paid tax as per the law of a foreign country. Where an agreement is entered into by the Government with another country, then incomes e arned by an assessee outside India will be chargeable to tax as per the law of that country and the assessee will not be charged with the tax in respect of such income. Where no such agreement exists, then relief will be to the extent of the Indian rate of tax.

Inter-State sale

RAMESH & Co declared an inter-State turnover of Rs 10.20 lakh for the year ended March 31, 2000. The dealer, however, did not collect any tax and claimed that the sale price was inclusive of tax. In this situation, what is the amount the dealer should re mit as sales tax assuming the tax rate at 4 per cent.

b) Meghdoot & Co made an inter-State sale of Rs 2.50 lakh for the year ended March 31, 2000, and claimed that its total turnover as less than the basic limit for registration under the Act. However, the Revenue levied tax at 10 per cent on the sales made . Decide the tax liability assuming that the turnover is less than the minimum required for registration as per the State tax mechanism.

c) What is transfer of goods otherwise than by sale?

Solution: a) The turnover includes sales tax of 4 per cent, hence, sales represents 104 per cent. The tax liability would be Rs 39,230 (4 x Rs. 10.20 lakhs/104).

b) Since the turnover is less than the basic limit for registration, the assessee need not collect or pay sales tax in terms of the Central Sales Tax (CST) Act. The tax levy at 10 per cent of tax made is not correct.

c) Section 6 A of the CST Act, 1956 deals with transfer of goods otherwise than by way of sale. Transfer of goods from head-office to branch or an agent in another State will not amount to sales and no tax liability would be attracted. However, the trans fer of goods not meant for sale will have to be proved by the dealer and should furnish Form F alongwith evidence for despatch of goods. The assessing authority, after testifying the correctness of the transaction, will pass an order, and such goods will be deemed as transferred otherwise than for sale.

Definitions

DEFINE the following: i) dealer; and ii) sale price.

Solution: i) The term `dealer' would mean any person would does the business of buying, selling, supplying or distributing goods, directly or indirectly, for cash or for deferred payment or for commission, remuneration or other valuable consideration. It includes even those who do business regularly or otherwise.

It includes even a commission agent, del credre agent or auctioneer for the purpose of tax levy.

ii) Sale price means the amount payable to a dealer as consideration for the sale of any goods. It includes even the sums charged for anything done in respect of the goods by the seller before delivery thereof to the buyer. Even weighing charges, if char ged separately, shall be included in the sale price.

Sale price, however, will not include cash discount allowed to the buyer; and so also freight, delivery or installation charges if charged separately by the seller.

(A CA (Intermediate) model paper on direct taxes.)