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SUPPOSE an employee is enjoined as per the terms of service to give a three-month notice when he resigns or 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.

Filial duties

WHEN cost of education is going through the roof, the income-tax law offers a laughable exemption of Rs 100 per month per child subject to a maximum exemption in respect of two children towards education expenses and Rs 300 per month towards their hostel expenses. Further, the deduction to a student up to a maximum of Rs 40,000 towards repayment of loan for higher education seems to be misplaced — the tax benefit should be given to the parent so that he is enabled to fulfil this filial duty of his better. -- R. Srinivasan, e-mail

There cannot be two opinions on what you say. The `princely' exemption of Rs 100 and Rs 300 should be done away with and replaced by a deduction under chapter VI-A up to a liberal limit to take care of the education expenses incurred by a parent on his wards. But the recent amendment to Section 88, recognising education expenses up to Rs 12,000 per child subject to a maximum of Rs 24,000 as one of the qualifying investments, is a good beginning.

Let the existing regime of incentive to the student coexist with the suggested regime because there are children who would rather not burden their parents and would take pride in standing on their own feet.

Slack bills

SOME of our suppliers and service providers are very slack in submitting their bills so much so that we are constrained to provide for the related expenditure in our accounts on accrual basis by way of provisions. Our auditors object to this practice. Will this pass muster under the income-tax law? -- Krishna Chaitanya, e-mail

What perhaps makes your auditor allergic to this practice is the use of the term `provision' with its implications of lack of substantial accuracy. There is no reason why you should call recognition of an actual liability a provision. The fact that bills have not been received does not lessen your liability.

Salary and rent are paid as a matter of course, aren't they, without bills being received but in pursuance of contract. There is no reason why a liability should not be similarly recognized if it has arisen in pursuance of a contract even though bill for the same hasn't been received.

Gifted asset

UNDER the block concept, from the written-down value (WDV) money payable in respect of any asset falling within that block which is sold or discarded or demolished or destroyed is required to be deducted. What happens when an asset is gifted? -- Gowrish, e-mail

This indeed is a serious omission. The upshot is that despite the gift, the donor continues to get depreciation which simply is not on. The donee too gets depreciation which, in terms of Explanation 2 to Section 43(1), would be with reference to the WDV in the hands of the donor immediately prior to the gift.

Depreciation to both the donor and the donee in respect of the same asset could not simply have been intended. But so long as this omission continues in the statute both would be justified in claiming depreciation.

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

S. Murlidharan

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