The Hindu Business Line : Does interest payable hold interest?

A COMPANY has not provided for interest payable to a scheduled bank in respect of a term loan, and accordingly has attracted qualification from the statutory auditor. How should the tax auditor deal with this? -- Nithya Srinivasan, Kancheepuram

The deductibility of interest due to a scheduled bank in respect of term loan is, among other things, governed by Section 43B. In terms of this section, such interest is not deductible while computing the income of the company for the year under review because it has not been paid (presumably) before the due date for filing of income-tax return. Therefore, such interest will become deductible only in the previous year in which it is actually paid. Strictly, the tax auditor need not therefore do anything. But he may bring out the fact that there is no occasion to invoke Section 43B, as the company has not claimed such interest as deduction in the first place.

LTCG shelter

CAN one utilise the tax shelter offered by Section 54EC in respect of long-term capital gain from depreciable assets that has been deemed to be short-term gain by Section 50? -- Janarthanan, Chennai

Section 50 deems any credit balance in a block of depreciable asset at the end of the previous year as "capital gains arising from the transfer of short-term capital asset". This puts paid to any prospect of taking shelter under Section 54EC which is possible only when the "capital gain arises from transfer of a long-term capital asset". The legal fiction created by Section 50 precludes invocation of provisions that are otherwise applicable to long-term capital assets. Which is what the Allahabad High Court said in CIT vs Upper Doab Sugar Mills (1979 116 ITR 240) in the context of Section 55(2). Thus the favourable regime of Section 55(2)(b) which permits the assessee to substitute at his option the market value of the capital asset as on April 1, 1981, in place of its actual cost is not available when the asset that has been transferred happens to be the one that comes under the purview of Section 50.

Two businesses

A PARTNERSHIP firm carries on two distinct businesses — retail that is assessed under Section 44AF and commission sales. For fixing the limits under Section 40(b) as to remuneration to partners that is deductible while computing the firm's taxable income, will the presumptive profit under Section 44AF together with the profit of the commission trade be the basis? -- Kameswari Srinivasan, e-mail

There would be no difficulty if the firm maintains books of accounts as required under Section 44AA and follows it up with tax audit under Section 44AB in order to break free of the presumptive profit of 5 per cent of the retail turnover. This it will do only when the actual profits are less than the one arrived at by applying the presumptive rate of 5 per cent. But if the retail profits are higher than 5 per cent, obviously the firm would be happy to go along with the presumptive margin. The problem in that event would be that there inevitably would be a hotchpotch of presumptive and actual profits from two distinct sources. The deduction towards working partners' salary and interest on capital to partners will have to be allowed with reference to such hotchpotch.

There could be another problem. The two businesses, though distinct, might nevertheless have common expenses. Section 44AF deems expenditure that are otherwise deductible under Sections 30 to 38 to have been allowed when income from retail trade is presumptively determined. Therefore, the assessing officer will allow only that part of the common expenses that can reasonably be attributed to the commission trade. Indeed, this may have the effect of pitting the firm and the Department at loggerheads.

Bill discounting

WHEN a bill is discounted before it is due for payment with a bank, does it become an off- balance- sheet item if the balance-sheet date falls ahead of such due date? -- G. N. Rao, e-mail

You would agree that any such celebration would be a trifle premature because the resultant contingent liability (the debtor who gave you the bill may renege on his commitment on the due date) would continue to dog you. The contingent liability will have to be shown as a note under the balance-sheet unless you choose the more conservative course of providing for contingencies as a liability.

(ASK! Send in your queries on accounting, auditing, corporate law and taxation to ask@thehindu.co.in)

S. Murlidharan

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