My income tax (IT) return was picked for scrutiny. The final hearing has taken place. I am expecting an assessment order within a month. As my return has been selected for the first time, what should I do after I receive the assessing officer's (AO) order? — Murali, e-mail After receiving scrutiny assessment order, check if any additions are made by AO. Examine if income has been correctly computed in the assessment order. For any corrections (apparent mistakes), rectification application can be done within four years from the end of the financial year in which the order containing the mistake was passed. Errors in facts and calculation mistakes due to clerical negligence, ignoring of mandatory provisions of the law and difference in the amount of advance tax and tax deducted at source. are some of the mistakes that can be rectified. Rectification order should be passed within six months from the end of the month in which the application is received by the IT authority. No fees and form has been prescribed to apply for rectification. Every rectified order is an appealable order. If there are any additions made by the AO to the income to which you do not agree, you can file an appeal under Section 246A of the IT Act, 1961, to Commissioner of IT (CIT)-Appeals (A). Application of appeal to CIT-(A) should be filed within 30 days from the date of receipt of copy of the order. CIT-(A) has to pass the order within a year from the end of the financial year in which the appeal was filed. However, this is an advisory limit. Appeal has to be filed in Form No 35. It should be supplied with a statement of facts, grounds of appeal, copy of the order of the AO and filing fees. The whole set is commonly known as memorandum of appeal. It should be submitted in duplicate. The CIT-(A) has the powers to admit additional grounds of appeal and also additional evidences during the proceedings. Filing of appeal does not prevent the IT authorities from recovery of demand. If the tax payer wants a stay on the demand, he has to file an application with the AO or to the CIT-(A). The third remedy available is revision application to CIT under Section 264 of the IT Act. Application for revision can be filed only if the time limit to file appeal under Section 246A has expired or the tax payer has waived his right to appeal in writing. Order under Section 264 is non-appealable. Revision application can be made only against the order and not against intimation. The tax payer can either prefer an appeal or can apply to CIT. Both remedies are not available simultaneously even if they pertain to different matters.   Recently, I sold an apartment. I filed my income tax (IT) return by claiming cost of improvement. The assessing officer (AO) is not prepared to give me the benefit. — Manohar, e-mail In the case of AO, Ward 25(1)(3), Mumbai, v Arjun B Bhandari, the tax payer had incurred cost of improvement and shown it in the balance sheet of different years filed with the IT department. The IT Appellate Tribunal held that the cost of improvement reflected in the balance sheet of the earlier years is sufficient evidence and, hence, the benefit of indexed cost of improvement cannot be denied.  

I undertake futures and options (F&O) trading in the stock exchange. My brother does intra-day transactions. My father plays safe by executing both types of trading. My mother invests directly in equities and mutual funds. Unfortunately, all of us incurred losses in the last fiscal year. How to deal with these losses in the income tax return?

— Ashish Shrimali, e-mail

Loss from trading in F&O is a non-speculative business loss and can be set off against any other income, except salary income. If business loss cannot be fully set off against the income in current year, it can be carried forward for the next eight years. The carried-forward loss can be set off only against business income in the subsequent years and not against any other income.

Income from intra-day share transactions is treated as speculative business income as the trade is settled without delivery. It is classified as speculation loss and can be set off only against another speculative income. Thus, if you incur loss in intra-day trading, it cannot be set off against any other income such as rental income and bank interest unlike losses incurred in F&O transactions. Loss that cannot be set off against speculative income in the current year can be carried forward o be set off against speculative income of any of the next four subsequent years.

Those dealing in equity are called traders or investors, depending on the volumes and frequency of transactions undertaken. Frequent dealings in equities resulting in large volumes are executed by traders. Those undertaking trading occasionally are investors.

Trading income is reported as business income. Loss is treated as business loss. Whether it is speculative or non-speculative loss depends on taking of delivery. Investor's income is capital gains. Profit arising from selling shares within one year from the date of their acquisition is called short-term capital gain (STCG). After a year, the income is long-term capital gain (LTCG).

Equity, balanced and hybrid mutual funds are long-term assets if held for more than 12 months. Debt mutual funds are long-term assets if held for more than three years. Thus, loss on the sale of mutual funds will be long- or short-term capital loss depending on the period of holding. Short-term capital loss, if any, can be set off against STCG or LTCG in the same year. Long-term capital loss can be set off only against any other long-term capital gain. Capital loss that cannot be set off in the current year can be carried forward for eight assessment years. To carry forward the loss, the return of loss must be furnished within due date of furnishing the return.

Of late, rating of debt issuance of companies is being downgraded frequently. Can you explain the reasons?

— Sundar Dass, e-mail

Credit rating is an analysis of the credit risks associated with a financial instrument of an entity. A rating is assigned to it by credit rating agencies such as Care Ratings, Crisil, Icra and India Ratings and Research after a comprehensive analysis of the business and financial risks, management quality, ability to service debt and other parameters. The review helps in assessing the financial health and solvency of the Instrument or entity.

Credit rating evaluates the credit risk of a prospective debtor, predicting its ability to pay back the debt. It is an implicit forecast of the likelihood of the debtor defaulting.

A downgrade is a negative change in the rating of a security. It occurs when the rating agency feels that the prospects for the security have weakened from the original recommendation due to change in the issuer's operation and outlook or that of the industry. Rating agencies assign letter grades to debt. When a bond is downgraded it moves from A rating to BBB rating. Rating agencies apply plus or minus signs for ratings from AA to C or from A1 to A4 to reflect comparative standing within the category.

Debt mutual funds are assigned ratings based on the rating of the securities they hold and strategy of the fund. If a fund holds a security whose rating has been downgraded, the immediate fallout is on the NAV of the scheme. The quantum of the impact will depend on the percentage of the particular security in the scheme's portfolio. The higher the exposure to the downgraded security, the stronger is the negative impact on the scheme's NAV.

How can a private trust help in estate planning?

— Jaldeep Naik, e-mail

Many who are aware of estate planning do not go beyond preparing a Will. Though accepted by law and society, there are some serious limitations with a Will for large estates.

A Will comes into play only after the creator of the Will dies. It needs to be probated. It can be contested in the court of law. Changing a Will can become a challenge if the testator is not fit because of physical or mental illness. It causes sibling rivalry, which results in destruction of wealth.

A private trust for estate planning can avoid Will-related hassles. It is an effective medium to transfer wealth to the next generation. A trust is a vehicle through which the estate-owner, that is, the creator of the trust or settler, can transfer his property to some beneficiaries and, at the same time, benefit from it. The trust is managed by trustees. Even when there are disagreements within the family, wealth is protected for future generations.

The biggest advantage of a trust for business families is that the business can continue through a trust. Management and ownership of the business can be separated. Succession planning in the business happens in a transparent and peaceful manner

A combination of a trust and a Will gives an estate owner varying levels of control on his or her assets. Appointments of outside and independent individuals or institutional entities as trustees can rule out biases and protect beneficiaries' interests. Thus, estate owners and beneficiaries can achieve their goals, including philanthropy, effectively through a trust.

I am about to purchase a second-hand car for the first time. Can you tell me about car insurance coverage?

— Suraj, e-mail

Buying a second-hand car without purchasing comprehensive car insurance makes your vehicle vulnerable to third-party risks, theft and natural and man-made calamities. Car insurance can be a third-party liability policy or a comprehensive policy. A third-policy liability policy does not cover any type of damage caused to the insured car.

Check if the first owner has a valid insurance policy. If he has, get it transferred in your name, that is, the new owner. Confirm the claim history with the insurer to verify information provided by the previous owner. Alternatively, you can buy a new policy from your preferred insurance company.

When buying a second-hand car, the new vehicle owner has to apply for transfer of the insurance policy in his name within 14 days under Section 157 of the Motor Vehicle Act, 1988. The third-party section of the policy gets transferred automatically within these 14 days. If the new owner fails to apply for a policy transfer within 14 days, then the insurer is not liable to bear losses.

An insurance policy might come loaded with difficult-to-understand technical terms. But read it anyway before signing on it so that you know what is covered and how to file a claim. Consult an insurance professional to explain the terms you do not understand.

When buying a motor insurance policy, consider add-ons such as zero depreciation, loss of keys, roadside assistance and tyre bursts. Generally, the cost of such add-ons is marginal but they go a long way in ensuring smooth claim settlement.

Many accidents take place in monsoon. Consider add-ons such as engine protector covering consequential losses or damages to crucial internal parts such as engine or gear box due to ingression of water or leakage of lubricating oil due to accidents.

The return-to-invoice insurance covers the financial shortfall between the amount received from the insurance policy and the purchase price of the car, as confirmed in the invoice of sale, if the car is declared a total loss. Inconvenience allowance is given on a per day basis for the period the vehicle is undergoing repairs on account of an accident.

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