The Hindu Business Line : Is it time for another voluntary disclosure?

NOW that the Budget is nearing, should the Government think in terms of another voluntary disclosure scheme to meet its gargantuan financial needs? - Malati Sarkar, Kolkata

Tempting as it is, personally I disapprove of such schemes for three reasons.

First, it projects the government of the day in a bad light, of being impotent in not cracking the whip against black money.

Second, it has a tremendous demoralising effect on honest taxpayers.

Third, it gives a leg-up to tax evaders who look forward to such schemes and pounce with alacrity the moment they are announced. They emerge clean after paying a small conscience money to the exchequer.

The Wanchoo Committee of yore said much the same when it found the same people resorting to successive schemes thumbing their nose in the process at the de rigueur admonition accompanying each such scheme that this is the last opportunity for returning to the path of rectitude.

Delivery issue

DOES the tax treatment of income from trading in shares depend upon the fact whether delivery was taken for shares purchased? What about futures? - Arthi Jayaraman, e-mail

Section 43(5) says `speculative transaction' means a transaction in which a contract for the purchase or sale of a commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips.

In the light of this definition, a person who buys an option to buy a share at a future date and lets the option lapse because it is not profitable would have indulged in a speculative transaction.

Had he gone through with the transaction by exercising his option, the option premium that he paid together with the cost of the shares would have constituted the acquisition price.

But when the option is not exercised resulting in the option premium becoming a dead loss, there is no way it can be claimed as a short-term capital loss because evidently the loss did not arise out of transfer of a capital asset.

But in futures, unlike in option, one has to go through with the transaction. If the settlement is delivery-based in the futures market, the underlying transaction cannot be treated as speculative.

MD of three

IF A person is simultaneously the managing director of three companies, two of them being private, can he receive remuneration from all the three without any limit? - Murlimanohar, e-mail

Section 198 sets the limit for managerial remuneration of a public company at 11 per cent of the profit.

Section 309(3) permits payment of monthly remuneration or annual commission on profits or a combination of the two to the managing or whole-time director subject to a limit of 5 per cent of profits for one such director and if there is more than one such director 10 per cent for all of them put together.

If such a director happens to receive commission from the company, he shall not be, in terms of Section 309(6), entitled to receive any remuneration from any subsidiary company.

Therefore, if the two private companies referred to by you are subsidiaries of the public company, he cannot get any remuneration from the two private companies assuming the entire or part of his remuneration is in form of commission.

If however he receives no commission from the public company, there is no bar to his receiving remuneration from the subsidiary private companies.

There would be no bar or limit whatsoever to receiving remuneration from private companies which are not subsidiaries of a public company.

What is turnover?

FOR enforcing accounting standards, the ICAI has classified companies into various categories.

One of them is companies with turnover in excess of Rs 50 crore. It is not clear whether for this purpose the turnover should be reckoned independent of excise duty. - T. N. Sivasubramaniam, e-mail

This ambivalence indeed bedevils many an accounting situation.

But the Supreme Court has been steadfastly holding the view in the tax context that excise duty and sales tax forms part of turnover.

This has now been implicitly recognised by the I-T Act with Section 43B thereof allowing indirect taxes as expenditure only on actual payment which presupposes their inclusion in revenue in the first place.

In the accounting context too it is time the ICAI removed the present leeway (and the resultant ambiguity) to account for sales net of taxes.

Pref. allotment

WHAT is the up and downside of preferential allotment of shares? - Debrati Chowdhry, Kolkata

Preferential allotment is antithetical to rights issue, which is one of the cornerstones of corporate democracy.

A rights issue maintains the inter se stakes of shareholders in the company.

Normally, rights issue is the norm when the capital is sought to be increased. But with a special resolution of shareholders or with an ordinary resolution coupled with Central Government approval, further issue of shares can be made in a manner that would upset the rights issue requirement.

One can justify the departure from the norm when a foreign collaborator insists on picking up sizeable equity stake in the company.

A similar justification is statutorily provided by Section 79A when it permits issuance of sweat equity to employees among others.

But in India often the promoters misuse preferential allotment to nest their own feathers.

During boom, they sell their existing holdings and creep back to their original position by persuading the company to allot preferential shares at a concessional rate, thanks to SEBI's pricing formula in this regard.

It is good that the SEBI is going to prohibit sale of shares six months before and after the allotment of shares preferentially.

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

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