Personal Finance Tuesday, December 11, 2012 18:57 Hrs IST

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TAXATION

Tax Matters: Can a mobile company be made a member of a housing society?

The principle of mutuality cannot be applied by making a mobile company a temporary associate member. The rental receipts would be subject to tax

Our co-operative housing society has allowed a mobile company to put up its towers on the terrace of the building. As rent receipts would be from non-member, they would be taxable. To avoid taxation, we have made the mobile tower company our temporary associate member. Is this planning safe?

K Amutha, e-mail

Generally, the surplus derived by a mutual concern is not chargeable to tax. Therefore, a trade, professional or similar association, which functions on the principle of mutuality, is not chargeable to tax if there is any surplus arising on account of the subscriptions, membership fee, or entrance fee.

However, the principle of mutuality cannot be applied by making a mobile company a temporary associate member. Accordingly, the rental receipts would be subject to tax. Hence, the planning may put your society in big trouble.

Can an assessee claim balance additional depreciation of 10% in the second year if the new asset is put to use for less than 180 days in the first year of claim?

— Krishnaiah Mandlalolla

Section 32 (1) (iia) of the Income Tax Act, 1961, says an assessee in the business of manufacture or production of any article or thing can claim enhanced depreciation at the rate of 20% of the actual cost of new plant and machinery other than ships and aircraft acquired and installed during the year. This enhanced or additional depreciation is in addition to normal depreciation.

However, if such asset is acquired and put to use for less than 180 days in the previous year, then the rate of additional depreciation is 50% of 20%, i.e., 10%. The additional depreciation is allowed only once and that too in the previous year in which the eligible asset is acquired and installed. Hence, the assessee cannot claim balance additional depreciation in the second year.

Practically all our politicians are corrupt. Over and above grease money, they receive remuneration and fat allowances, which has gone up three-four times in the last five years. The only hope of has some check on them is from with the high courts and Supreme Court. How are the politicians taxed? Under which head?

— Dhanpal Paul, e-mail

Income can be taxed under the head, ‘Salaries,' only if there exists an employer-employee relationship, either in the present or in the past, between the payer and the payee. The income would not be taxable under the head, ‘Salaries,' if this relationship does not exist.

Members of parliament (MPs) and members of legislative assemblies (MLAs) are not employed by anybody. They are elected by the public. Hence, their remuneration cannot be said to be salary under Section 15 of the Income Tax (IT) Act, 1961. Their income is taxable under the head, ‘Income from other sources', as consequent to election they acquire constitutional position and discharge constitutional functions and obligations. Also, under Section 10(17) of the IT Act, daily allowance, any allowance received under the Members of Parliament (Constituency Allowance) Rules, 1986, and any constituency allowance is exempt. MPs and MLAs can reduce their income by claiming deductible expenses under Section 57 of the IT Act.

Pay and allowances received by chief ministers or minister is taxable under the head, ‘Salaries'. It cannot be taxed under the head, ‘Income from other sources', as held in the case of Lalu Prasad v Commissioner of Income Tax in 2009.

Judges of SC and HCs receive salary. Such salary is chargeable as income under the head, ‘Salaries'. Even though they have no employer and are constitutional functionaries, it has been expressly stated in the Articles 125 and 221 of the Constitution that what the judges receive are salaries and their income is taxable in the same manner as the salary of any other citizen of India.

Our company transferred shares held by it in various companies as stock in trade to its subsidiary at the book value of Rs 6 lakh. The market value of the shares at the relevant time was Rs 18 lakh. While making the assessment of the subsidiary, the assessing officer (AO) assessed it on the surplus of Rs 12 lakh. Is the assessment done by the AO correct? If not, what are the remedies available to our company?

— Rajarao Mamilapally

When a trader transfers his goods to another trader at a price less than the market price and the transaction is bona fide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched, to ascertain the profit from the transaction. Therefore, the AO is not justified while assessing the subsidiary on deemed profit of Rs 12 lakh. The company, therefore, should file an appeal with the Commissioner (Appeals) of Income Tax or a revision petition under Section 264 of the Income Tax Act, 1961, with the Commissioner of Income tax.

* Our company purchased a plant on 3 June 1988 for Rs 2.5 lakh for its research laboratory and claimed deduction of Rs 2.5 lakh under Section 35(2)(ia) of the Income Tax (IT) Act, 1961. The research activity for which the machine was purchased ceased in 2009-10 and the machine was brought into business proper on 1 November 2010 (market value: Rs 1.3 lakh). The machine was sold for Rs 1.5 on 4 April 2011. Rs 1.5 lakh has been credited to the capital reserve account.

* Our company purchased a machine on 1 December 1988 for Rs 3 lakh and claimed deduction of Rs 3.75 lakh (being 125% of Rs 3 lakh) under Section 35(2B) of the IT Act as the machine was meant for an approved in-house research activity. The particular research activity for which the machine was purchased ceased on 1 November 2011 and the machine was sold, without being used for any other purpose on 19 December 2011 for Rs 2 lakh. This amount was credited to the capital reserve account on the same day.

— Shamji Umed Singh, e-mail

As per Section 41(3) of the IT Act, any amount realised on transfer of an asset used for scientific research is taxable as business income to the extent of deduction allowed under Section 35 of the IT Act in the year in which the transfer takes place. However, taxable income under this section cannot exceed deduction availed earlier under Section 35. If the asset is used for any other purpose before it being sold, then such amount would not be taxable. Hence, surplus arising on sale of machine of Rs 1.5 lakh is not includible under Section 41(3) as the asset sold has been used for other purpose.

Surplus arising on sale of machine on 19 December 2011 is taxable under Section 41(3) as it is sold without being used for any other purpose. Amount taxable is Rs 2.75 lakh (i.e., excess of sale price and deduction, allowed under Section 35(2B) of the IT Act, over capital expenditure Rs 2.75 lakh).

Our interest account included Rs 35000 charged by the Employees' Provident Fund (EPF) Commissioner for delay in depositing the members as well as the company's contribution. Is this allowed as business expenditure?

— Jyothi Lobo, e-mail

Interest charged by the EPF Commissioner for delay in depositing contribution cannot be equated with penalty payable for infraction of law. It is a kind of damage for default in performance of an obligation. Hence, it is deductible as business expenditure.

Our partnership firm is charging 12% interest on the temporary debit balances of our partners. We are of the opinion that such interest income in the hands of the firm is not taxable because there is no distinction between a partnership firm and the partners on the principle of mutuality. Is our understanding correct?

— Devendra Jatiya, e-mail

The concept of ‘mutuality' means that the contributors and the beneficiaries are identical. One cannot make profit by dealing with himself. Hence, such income would not be chargeable to tax wherever such concept applies.

However, the concept of mutuality is not applicable for a firm if interest income is from money lent by such firm to its partners. Temporary debit balances are as good as money lent by the partnership firm to its partners. Accordingly, such interest income would be chargeable in the hands of the partnership firm.

I am a partner in two partnership firms. Unfortunately, since the last two years, business is not up to the mark. Income tax (IT) returns of the partnership firm are also pending. Hence, I have taken up a job and getting about Rs 6 lakh per annum by way of salary. Recently, I came across a competent, straight-forward chartered accountant and his staff members who, after putting a lot of hardwork, were able to complete the accounts, IT returns were filed for the partnership firms as well as for me before 31 March 2012. But, on account of liquidity problem, I could not pay the self-assessment tax. What will happen?

— Lokendra Biswas, e-mail 

The failure on the part of the assessee to pay whole or any part of the self-assessment tax or interest or both under Section 140A of the Income Tax (IT) Act, 1961, makes him deemed to be an assessee-in-default within the meaning of Section 140A(3) of the IT Act. The assessing officer can levy a penalty on the assessee-in-default by virtue of provisions of Section 221(1) of the IT Act. The maximum penalty that can be levied on the assessee is to the extent of amount of tax remaining unpaid (tax in arrears). Before levying penalty, the assessee is given an opportunity of being heard. If the assessee proves the default to be good and sufficient reasons are stated, no penalty is levied.

The replies are only in the nature of guidelines. The tax counsellors and the publication are not responsible for any decision taken by readers on the basis of the same. Readers may e-mail their queries on direct taxation to: tax-matters@capitalmarket.com

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