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CAN an employer pay a small basic salary but give a sprawling bungalow taken on lease to the employee as rent-free accommodation to help him save tax? -- T. S. Sundaresan, Secunderabad

Yes, the new rule on valuation says such a house must be valued for the purposes of employee taxation at actual rent or 10 per cent of salary, whichever is less. Earlier, the rule sought to maintain a link between salary and rent-free accommodation by capturing fair-rent of the property as well into the tax net to the extent it was in excess of a prescribed percentage (60 per cent in case of metros) of salary. But no longer. So much so, today if one gets a basic salary of Rs 5,000 and a palatial house costing Rs 50,000 a month to the employer, only Rs 500 per month would be added to the employee's taxable income.

Taxation confusion

I AM student of taxation. When I read Section 145A, I get confused because it requires all taxes to be included in the value of purchase and sale as well as stock but does not allow credit for any rights arising out of payment of such taxes. What exactly does this mean? -- Pritam Singh Gulati, New Delhi

What it means is this. Purchases should include all taxes, including excise and sales tax. Sales should not be accounted for tax purposes under the `net method' but instead should be accounted for under the gross method, that is, inclusive of taxes such as excise and sales tax that have to be recovered from the buyer being part of the selling price.

As a corollary, it wants stock of raw materials to be valued at cost inclusive of taxes and duties without taking credit for Cenvat which one may be entitled to. Finished goods too must be valued inclusive for excise duty because excise is payable on manufacture even though the taxable event is postponed till the date of removal for the sake of administrative convenience.

The prohibition on taking credit against such excise duty implicit in the value of finished goods is in keeping with the half-baked character of Cenvat in that it is more in the nature of source of funding rather than a pure VAT. If and when we have full-fledged Central VAT, this prohibition will automatically go because in that event excise will be provided for only on the value addition.

Director quits

A DIRECTOR resigns verbally at a board meeting, whereas the articles required resignation to be communicated in writing. Is the resignation valid? -- Rachana Lodaya, e-mail

The law is silent on the issue of resignation. Therefore the provisions, if any, in the articles hold sway. If the articles insist on written resignation, so be it.

Interim dividend

CAN interim dividend be revoked? -- Rachana Lodaya, e-mail

The time-honoured view has been that interim dividend is revocable till such time it is approved by the shareholders at the annual general meeting (AGM). But the conscious elevation of interim dividend to the status of dividend by insertion, by the amendment brought out in 2000, of a specific definition of the term `dividend' cannot be lost on anyone.

One of the reasons why interim dividend was brought under the same discipline as obtains for final dividend was to halt the tendency to announce interim dividend only to rescind it after the quotation for shares was suitably ratcheted up.

It may be noted that within five days of declaration of interim dividend by the board, the amount has to be deposited in a separate bank account (Section 205(1A)) and thereafter the provisions contained in Sections 205, 205A, 205C, 206 and 206A apply as if it were final dividend. In other words, once the money is earmarked in a special bank account, there is no way it can be retracted. A board perhaps could rescind its decision within five days, that is, before earmarking the money in a special account. But once it is earmarked, there is no way it can be revoked.

Asset sale to MD

WHAT is the procedure to be followed if a company wants to sell an asset to its managing director at book value? -- Rachana Lodaya, e-mail

I take it that what is sought to be sold is not an undertaking as to warrant shareholders' approval under Section 293. Presumably, what is sought to be sold is furniture, computer, car, and so on. This can be done on same terms applicable to employees in general unless the contract of employment puts the MD in a special category for this purpose.

Quorum query

IF TWO directors leave the board meeting after one hour and the remaining directors go through the agenda, will it be all right? -- Rachana Lodaya, e-mail

Yes, provided the quorum is present even after the departure of two directors. In fact, at the time of each transaction, it must be ensured that the quorum is present. It will not do if the quorum was present initially.

Price rise

HOW does inflation affect the common man? -- P. Prashant Nair, Bangalore

Inflation affects the common man when the growth in his income does not keep pace with the inflationary rate. A 10 per cent increase in salary accompanied by an inflationary rate of 8 per cent would leave a salaried man unscathed. But then inflation has to be viewed from several angles. Wholesale rate of inflation and retail rate of inflation may not move in tandem. That is the reason why many times we are baffled when the newspapers report very low inflationary rate even as we are paying through our nose. The reason is not far to seek — the basket of goods entering the whole price index and the basket of goods and services entering the consumer price index are not the same.

Similarly, inflation has sectoral connotations as well. While increase in oil prices has a chain effect, increase in property prices may not lead to overall inflationary spiral. Similarly, an increase in the Sensex, the stock market bellwether, may not necessarily be reflected in the consumer price index.

Why be harsh

WHY is it that the income-tax law is lenient towards reimbursements and harsh towards allowances? -- Malathi Jagannathan, Villupuram

There is a sound logic behind this. Allowances are given as a part of salary. An employee gets the vested right to receive the same as a part of his monthly salary. So much so, an employer cannot keep tab on whether it has been utilised for the stated purpose. Reimbursement takes care of this facet of employee remuneration. Medical allowance can be diverted for entertainment or any other purpose, whereas a medical reimbursement on paper cannot be though it must be conceded that even the latter can be misused — witness the mushrooming growth of cosmetics-cum-medicine stores.

Similarly, despite sumptuous lunch allowance, an employee may look famished whereas an efficient canteen run by the employer can keep him sated leading to greater efficiency. Some of the allowances have been exempted from tax only to the extent they have been actually spent for business purposes — witness conveyance and travel allowance. These allowances are granted not to take care of personal needs of the employee but to facilitate business.

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

S. Murlidharan

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