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THE RECENT Budget has proposed to give tax exemption for VRS even if received in instalments.

But section 10(10C) says the exemption cannot be claimed in more than one assessment year. Is there a contradiction? -- Angayarkanni, Chennai

It is true that the exemption is an once-in-a-lifetime benefit. And the Budget proposal has not altered this fundamental facet of the tax regime for VRS. Salary and by extension VRS compensation is taxable on receipt, or when it becomes due — whichever is earlier.

Therefore, even if the VRS compensation of say Rs 5 lakh is payable over a period of five years, the entire amount becomes due immediately. The exemption under Section 10(10C) can be claimed in respect of this entire amount.

In the subsequent four years when the instalments are received, there would be no scope to include them in the salary income because they have already been included when they fell due. Since in the subsequent years VRS instalments will not be treated as salary income, the question of granting exemption does not arise.

Understanding MOU

WHAT EXACTLY is an MOU, Memorandum of Understanding? -- Jeetu Vij, Kerala

An agreement which is enforceable in law is a contract. MOU is not a contract because it lacks one of the vital ingredients required for vesting it with the status of contract — consideration. MOUs, in other words, cannot be enforced in a court of law.

The reason why they are entered into is to, perhaps, formalise the understanding by the two sides on a given issue so that there is no difference in perception and both sides move in the same direction.

Capital assets acquisition

WHAT DOES the revised AS-11 seek to achieve? -- Rekha Ragunathan, New Delhi

The main area of revision is the one relating to acquisition of capital assets with foreign currency.

Earlier, the mandate was to increase or decrease the actual cost for the increased or as the case may be the decreased rupee liability at the time of payment due to exchange rate fluctuations.

Now the mandate is to charge the increase in liability against the current profit. Similarly, any abatement in rupee liability should be treated as current year's income.

I for one feel that this is one area where we should have clung on to our original stand though it was at variance with the IAS on the issue as well as with the US GAAP, based as it was on a sound logic.

The original standard reflected both the actual cost as well as depreciation correctly.

Security for dealership

A PERSON has secured dealership of a company for which he has paid security deposit. Will interest from this deposit be included in the turnover for the purposes of Section 44AF? -- Y. Subba Rao, email

The accent of the section is on "retail trade in any goods or merchandise." Coupled with this the fact that the presumptive profit of 5 per cent is on turnover makes it clear that interest income is outside the pale of this section even if such interest has been earned in the course of carrying on of such business. The Parliament has evidently taken 5 per cent as the presumptive income of retailers having turnover of less than Rs 40 lakh.

When the Parliament took this view, it would not have contemplated extraneous income being included in the turnover because it would be wrong to include interest in the figure of turnover and deem 5 per cent thereof too as presumptive income. This would result in an absurd result — only 5 per cent of the interest income will become taxable.

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

S. Murlidharan

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