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SUPPOSE an employee is enjoined, as per the terms of service, to give a three-month notice when he resigns, pay salary in lieu thereof or adjust to that extent his earned leave, which is otherwise encashable, against such notice period. What are the tax implications of these? If the prospective new employer either directly pays to the current employer the salary in lieu of the notice period or reimburses the same to his employee-to-be, what would be the consequences?

-- V. Murali, Bangalore

Encashment of leave is taxable. But Section 10(10AA) confers exemption subject to certain conditions in respect of earned leave encashed on the eve of termination of employment for whatever reason. But leave, historically, has never been treated as income at the stage of accrual itself. In other words, tax authorities have never pounced on leave and put a value on it as soon as it is earned. That the law does not permit this is implicit when Section 10(10AA) exempts leave encashment up to a specified limit and subject to certain conditions, and leaves the balance to be taxed at the point of encashment which precludes taxing leave at the point of its accrual.

The same section, by talking only of the amount received on encashment, precludes value being put on the leave surrendered to the employer to be set off against the notice period.

As to the tax treatment of notice period being taken care of by the prospective employer is concerned, the law is explicit — clause (iii) of sub-section (3) of Section 17 says that any amount received from a would-be employer is taxable.

This takes care of reimbursement. And when such employer makes a direct payment to another employer, it would fall squarely within the ambit of the definition of perquisites, one of the clauses of which ropes in any sum paid by the employer in respect of any obligation which but for such payment would have been paid by the concerned employee.

Premium write-off

LATELY, there have been instances of companies writing off product development expenses, diminution in value of investments, deferred tax liability, and so on, against share premium account. Are these permissible? -- Madhu, e-mail

Section 78 of the Companies Act does not permit using securities premium account for any purpose other than the ones mentioned in sub-section (2) thereof, unless the Section 100-105 drill is rigorously gone through. None of the three write-offs mentioned by you make the grade under Section 78(2). Therefore, these companies seem to have violated Section 78 unless of course they had undergone the Section 100-105 procedure.

This is the legal position as the law stands. But a critical look at the four items allowed to be written off against the securities premium account by Section 78(2), reveals some muddled thinking. It is a trifle curious that fully-paid bonus shares are allowed to be issued to members out of the premium account but not cash dividend. Pray why? If Parliament's intention was that share premium collected from shareholders must be assiduously guarded and returned to them, it ought to have permitted cash dividend as well because a company should have the freedom to decide upon the mode of reward it wants to give to its members.

That Section 77A, which overrides other provisions of the Act, including Section 78, permits buyback out of securities premium account as well lends greater force to this argument. The sanctity of Section 78 would have be better maintained had it permitted use of share premium account only to reward the shareholders. The three other permitted uses countenanced by Section 78(2) have only served to undermine this sanctity.

Export turnover

WHILE computing the Section 80HHC benefit for export of goods, does one have to deduct from export turnover freight and insurance attributable to transportation of the goods beyond the custom station even when they are not part of the export turnover? -- Srivandana, e-mail

Both for the purposes of computing total turnover as well as export turnover, freight and insurance, as described in your query, have to be deducted only if they are part of the turnover. Suppose an exporter has exported on CIF basis and billed his foreign customer only for goods, without debiting him separately for freight and insurance, obviously, both his export and turnover would include the element of freight and insurance also. This must be excluded from both the figures.

Form 32

IS FORM 32 required to be filed when an alternate director is appointed as an additional director or when an alternate/additional director is appointed at an annual general meeting as a director? -- V. Murali, Bangalore

Yes, the idea behind Section 303(2), among other things, is that the ROC's record must reveal the actual status of a director, that is, the capacity in which he is holding the office. Any change in the status must be duly intimated.

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

S. Murlidharan

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