The Hindu Business Line : Why housewarming could mean HRA-taxing

I AM right now living in a rented house and paying rent therefor out of the HRA given by my employer. I plan to move into my own house sometime in February 2004 on completion thereof. What would be the tax consequences for me? - Shivprasad, e-mail

For the period you were in receipt of house rent allowance and paying rent, you will get exemption in terms of Section 10(13A). But the moment you stop paying rent, the entire HRA for the period you don't pay rent would become taxable. Therefore, the HRA for the months of February and March 2004 would become fully taxable assuming you move into your own house on February 1.

If the new house happens to be your only self-occupied house, its annual value would be taken at nil but you can claim the interest, if any, in terms of Section 24. This would result in loss from house property which you can set off against salary income.

Keyman query

IS THE premium paid on keyman insurance policy deductible as a business expenditure assuming it is well within the limit of 20 per cent of the policy amount? - Aashish Desai, Baroda

Yes, because keyman insurance policy is unique to businesses and professions. It is deductible under the omnibus Section 37(1). That it is a business expenditure is further reinforced by the fact that clause (vi) of Section 28 specifically ropes in any amount received under a keyman insurance policy as income from business or profession as the case may be. If a receipt is a business income, the corresponding expenditure to earn the same ought to be allowed as a business expenditure. The Government came down hard on single insurance policies and restricted the premium allowable for tax purposes to 20 per cent last year. But this was under Section 88. A business would remain unaffected by this amendment.

What applies to personal taxation does not automatically extend to business taxation.

VRS in a co-op

A COOPERATIVE society pays voluntary retirement compensation to its managing director, whereas Rule 2BA specifically keeps directors out of bounds. In the event, will the managing director alone lose tax exemption or his colleagues as well? Will this affect amortisation of compensation under Section 35DDA? - Dakshayanan, Chennai

The last question first. Section 35DDA does not predicate the amortisation thereunder to compliance with Rule 2BA. Therefore, even if the scheme falls foul of the said rule, amortisation would remain unaffected. Section 10(10C) makes it clear that the exemption thereunder is subject to the condition that the scheme made is in accordance with the guidelines.

One of the guidelines is the scheme should be out of bounds for directors of companies or cooperative societies. Strictly speaking, therefore, when this guideline is flouted, not only the directors will not get tax exemption but other employees, too, would be caught in the crossfire and lose exemption. Indeed this would be harsh on the latter.

Savings agents

THE Finance Act, 2003 requires individuals, among others, to pay a surcharge of 10 per cent of their net tax liability should their total income exceed Rs 8.5 lakh. I am a postmaster. Should I deduct tax at source under Section 194H from commission payable to small savings agents at the rate mentioned in Section 194H or at the rate mentioned in Section 194H as increased by 10 per cent surcharge? - P. Rajendran, Salem

Section 2(6) of the Finance Act, 2003 directly answers your query. Accordingly, unless the aggregate of such commission payable to an individual agent during the financial year 2003-2004 exceeds Rs 8.5 lakh, you do not have to add surcharge to the tax to be deducted at source from his commission.

Scrap sale

OUR company periodically disposes of chemical containers. Is it required to collect tax at source in terms of Section 206C which, among other things, targets sale of scrap? - R. Kannan, Coimbatore

Section 206C gives an exhaustive definition of the term `scrap' for the purposes of that section — "scrap means waste and scrap from the manufacture or mechanical working of materials which is definitely not usable as such because of breakage, cutting up, wear and other reasons." The accent is on scrap emerging from manufacturing process or mechanical working of materials. Evidently, in your case the chemical containers did not emerge from manufacturing process. Therefore, Section 206C is not applicable when they are disposed of.

Surcharged

IS SURCHARGE includible while computing the rate of tax prescribed by the Income-Tax Act and the Double Taxation Avoidance Agreement? - N. Satyanarayanan, e-mail

Yes, because both the basic rate and surcharge, though referable to the relevant Finance Act, actually spring from the provisions of the I-T Act.

Escrow, what?

WHAT is an ESCROW account? - Priyadarshini Batra, New Delhi

ESCROW account is a safety net mechanism for a creditor. For independent power projects (IPPs) many State governments offered the power generators comfort in the form of such account to assuage their anxieties as to timely payment of dues by the electricity boards.

Under the arrangement, the generator identified a few well-heeled and heavy consumers whose payments were required to be made into an earmarked bank account. The idea was to enable State electricity boards to pay off the generator its dues on account of purchase of electricity.

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

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