The Hindu Business Line : Consolidated pay can burn a bigger hole in your pocket

MY EMPLOYER is paying me a consolidated salary of Rs 18,000 a month, and says this is beneficial for me from the tax point of view. Is this correct? - Malavika Natu, e-mail

Nothing can be farther from the truth. Consolidated salary exposes one to higher tax liability. On the contrary, division of salary into tax-free allowances and perquisites would result in lesser tax liability. For example, transport allowance for commuting between residence and place of work is exempt up to Rs 800 a month.

Similarly, house rent allowance is exempt to the specified extent if you pay rent in excess of 10 per cent of salary. You can claim medical reimbursement, which is tax-free up to Rs 15,000, in addition to hospitalisation bills in approved hospitals. Education allowance for children is exempt up to Rs 100 a month subject to a maximum of two children. Though the exempt amount is laughably small, it goes towards reduction of the tax bill. He can give you leave travel concession which is tax-free provided you actually travel to any place in India. There are ways galore.

`De' demystified

I CAN understand merger but demerger beats me. - Pundarikaksh Bandopadyaya, Kolkata

Both merger and demerger are corporate restructuring tools. Demerger is relevant to multi-product or services companies. When a division is spun off into a separate company, it is called demerger. L&T Cement, which is part of the construction giant L&T, is all set to be spun off into a separate company. The idea is to realise the conglomerate discount which bedevils multi-division companies.

The sum of the parts in the share market, it is said, would be greater than the erstwhile whole. It is also necessary in a takeover exercise involving a multi-division company. A company may have both cement and electronics divisions. A suitor may be found for the cement division but obviously he would not be interested in taking over the company lock, stock and barrel. In that event, it would be necessary to carve out the cement division into a separate company.

Post-appointment

THE auditor of a company buys shares of the same company carrying voting rights after his appointment. What are the consequences? - Prabhakar Aggarwal, Pune

Section 226(3) contains the list of disqualifications for the office of auditor. The Companies (Amendment) Act, 2000 has added one more to the list — holding of security carrying voting rights. Section 226(5) says that, should an auditor attract any of the disqualifications after his appointment, he shall be deemed to have vacated his office as such. Therefore, the auditor in question automatically vacates office. But this regime is incomplete and half-baked.

What happens if the auditor just sits tight and does not inform the company. In a depository regime where the transfer is without hassles, the company may be brought into the picture, if at all, much later. What if he acquires shares in the name of his wife, for example? The company cannot possibly be expected to keep tab on the auditor all the time.

Because of these uncertainties, there could be ticklish and embarrassing situations. Will there be a vacuum in the office? Will this be treated as a casual vacancy resulting in the board getting the right to fill in such vacancy in terms of Section 224(6)(a). What happens if the auditor disposes of the shares thus acquired post-haste when caught with his pants down? Can the board in that event condone the temporary disqualification or is it duty bound to deem the office as vacated and step in to fill the resultant casual vacancy? At any rate the board has the right but is under no obligation to fill in the casual vacancy.

Two leases

DOES the income-tax law distinguish between financial and operating lease? - Govardana Rao, Vijaywada

No it does not. As per the Indian Accounting Standard on lease accounting, in case of financial lease, the ownership practically vests with the lessee and he, therefore, is required to show the leased asset in his balance-sheet and provide depreciation thereon.

As for the lessor, the transaction is essentially financial in nature and therefore his asset is monetary and not physical — receivables and not physical asset. The income-tax law stubbornly refuses to tow the accounting standard though the upshot would not be detrimental to the Revenue's interest.

When depreciation can be allowed to the beneficial owner of a building holding power of attorney, there is no reason why depreciation should not be allowed to the lessee in a financial lease. After all, he has acquired all the significant risks and rewards of ownership.

Long and short

WHAT is the difference between short-term and long-term capital gains? - Nalini Karunakaran, Hubli

If a capital asset, other than shares and units, is held for more than 36 months, it qualifies as a long-term capital asset. For shares and units the minimum holding period to make it as long-term is 12 months. Short-term capital gains merge seamlessly with one's other incomes and attract tax at the applicable slab rates.

Long-term capital gains are taxable at a flat rate of 20 per cent generally. While short-term capital loss can be set off against long-term gains during the same year, failing which within the subsequent eight years, the reverse is not permissible. Capital loss of both hues cannot be set off against other incomes.

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

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