The Hindu Business Line : The business of pleasure

Company executives are masters of camouflage. Do you think they would be so naive as to leave themselves vulnerable to attack by the taxman? In India, work is always combined with pleasure.

When an executive flies the company aircraft on a pleasure jaunt he would take care to arrange some company work as well. And neither the auditor nor the taxman set aside this fig leaf. But if caught with their pants down, they will have to reckon with rule 3(2) which says that the arm's length rule shall be applied in valuing those benefits not explicitly covered by a specific valuation principle.

Subsidiary definition

TRANSFER FROM and to subsidiary is exempt from capital gains tax. Now what is the definition of `subsidiary' for this purpose? - Kranti Prasad, Guntur

In the absence of a specific definition, one can look for light from enactments having a direct bearing on the issue. Therefore it would not be wrong if the definition of `subsidiary' given in the company law is adopted for this purpose.

Provision vs reserve

WHAT is the difference between provision and reserve? - Sudhamendra, e-mail

Part III to Schedule VI of the Companies Act defines these two terms. Perhaps you find the definitions given therein to be ambiguous.

Briefly, provision is made for a liability which has accrued but which defies precise quantification. For example, if rent has accrued it has to be provided for as an outstanding liability and not as a provision, because the figure of outstanding rent can be easily quantified. But not, let us say, arrears of salary pending negotiations.

Reserve is altogether a different kettle of fish. It is always a part of distributable or earmarked profits. For example, transfer to general reserve is not hemmed in by any condition except to the extent there are restrictions on paying dividend out of reserves.

But ship acquisition reserve created pursuant to Section 33AC of the Income-Tax Act is an earmarked reserve in that it cannot be used ultimately for any purpose other than acquisition of ship.

A loss legacy

CAN THE legal heir carry forward and set off the capital losses of his benefactor? - Sunil G. Namboodri, Thrissur

The legal representative steps into the shoes of the deceased in terms of Section 159. But this is only for the purpose of completing the assessment or reassessment proceedings. In other words, the capital losses of the deceased can be set off against his capital gains in the same manner and to the same extent as the deceased himself could have done had he not died. But if still the capital losses of the deceased remain unabsorbed, the legal heir cannot use the same for set off against his own capital gains.

The only relaxation from this rigour is to be found in Section 78(2) when it allows an inheritor of business to carry forward the unabsorbed business loss of his benefactor.

Default fairness

WHEN one is remiss in deducting tax at source he is treated as assessee in default with attendant consequences. But should not the tax coughed up by him be allowed as a deduction while computing his business income as otherwise the government would be collecting tax twice over — once from the person who ought to have deducted tax as well as from the recipient of the income? - Pramod Shrikant, Bangalore

What you say appeals to equity and good conscience. But these have no place in the frosty world of taxation. At any rate what appears to be double taxation may be viewed in another light — the one collected from the person remiss in discharging his TDS functions is, in fact, a penalty.

Certificate obviated

WITH dividend having once again become tax-free, is an Indian subsidiary required to issue a TDS certificate to its parent in respect of the dividend paid to it? - Praveen Ambardekar, e-mail

No, when dividend is simply not taxable and no tax therefore need be deducted therefrom, the question of TDS does not arise.

In good faith

WHAT sort of control can an employer possibly exercise to ensure that the loss from house property disclosed to him by his employees are genuine? - R. P. Malathi, Rajamundry

Parliament has been lax in allowing loss from house property of all hues to be set off against salary income for the purpose of TDS. It ought to have delegated the function of assessment insofar as it relates to income from house property only in respect of one-self occupied house that is exempt from tax.

By allowing all house property losses to be set off at the employer level, it has not only afforded an escape route to employees but, more importantly, made the lot of employers more onerous.

How can an employer possibly verify whether the house was vacant or has some unrealised rent? In any case, all that he can possibly do is to go by the declaration of the employee. And if he has done so, he cannot be hauled over coals should such declaration turn out to be untrue in its entirety or part.

Floor price

WHAT is the floor price of a share, and how is it decided? - Manas Dey, New Delhi

Floor price is a term that is normally associated with book-building exercise in the context of public issue of shares. Floor price constitutes the minimum. In other words, those bidding for shares in a book-building exercise have to set their sights at a price higher than the floor price. Maruti, for example, recently plumped for Rs 115 as the floor price for its Rs 5 share. At the end of the exercise, the public issue was made at Rs 125 the price at which there were takers for Maruti's shares on offer. Obviously, those who had bid would have bid at higher than Rs 115.

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

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