The Hindu Business Line : Water charges and rent in watertight compartments

Cannot such expenditure on water not be treated as rent, given the fact that a residence becomes habitable only if it has water? The question assumes importance in the context of exemption for HRA. - TAP Krishnan, Coimbatore

The taxman is not going to take kindly to this stratagem because the avowed aim of the section is to give tax subsidy for house rent and not for water charges, though I agree that the two ought not to be divided into watertight compartments.

Alternatively, so as not to tangle with the taxman, one may suitably increase the rent and ask the landlord to provide water free of cost as a quid pro quo.

The landlord need not fear any additional tax liability because the charges for water belong under `income from other sources' in computing which the actual water charges may be debited, thus reducing the additional income to zilch. But will the landlords play ball?

Options uncovered

WHAT are call and put options? - Prasoon, e-mail

When a person buys a call option, he gets the right to buy the agreed number of shares at a set price. He has the right but is under no obligation to buy. He will obviously exercise this right only if it is beneficial to him.

For example, if one has paid Rs 5 per share to buy 100 shares one month hence at Rs 200 a share, he would exercise this option only if the prevailing market price is more than Rs 205 per share.

A put option works in the reverse direction. Under a put option the buyer of the option gets the right to sell the share at an agreed price.

Demat question

I HAD to open two demat accounts because the depository participant insisted that the expanded names are different from names with initials. But the shares in either case belong to me.

If I sell some of these shares, what would be the cost? If I get my depository participant changed, will it attract capital gains tax. - L. V. Gandhi, Vishakapatnam

To answer the second question first, when there is a change in the depository, there no transfer because the beneficial interest in the shares continues to remain in the same hands. Coming to your first question, FIFO is the norm while zeroing in on the cost of shares held in the depository mode.

There is no dispute that you were the beneficial owner of the shares though some of them were held in your full name and some in abbreviated names.

Therefore, while the depository might have recorded the sale keeping in mind this distinction, you yourself are under no obligation to do so and can observe the FIFO principle taking the two accounts as a single unit in deference to the fact that you are indeed the beneficial owner in either case.

Inverse relationship

IT IS said that the interest rate and the price of the bond have an inverse relationship. Explain how. - Ramani, Kolkata

This is true of fixed rate bonds/loans. A bond carrying a coupon rate of 10 per cent will register an increase in price when the market rate for a similar maturity is slashed to 9 per cent. The reason for this inverse relationship is not far to seek. The yield from the 10 per cent security will be so much so that there would be a surge in demand for it pushing up its price. But nobody will buy it at a price that results in yield of less than 9 per cent.

Why buyback

TO ME, buyback of shares appears to be a wasteful exercise especially if done at very high prices. What is your take on this? - Monica Manchanda, New Delhi

In the US buyback is allowed as a treasury operation. In other words, a company buying its own shares is not required to cancel it straightaway as is the requirement in the UK whom we have followed suit.

Though this has attracted flak for being incestuous and facilitating insider trading, the Board is called to account should there be losses from such treasury operations. But when one buys back shares for cancellation, one does not know who exactly is benefiting.

Often in India, buyback has been used to shore up the control of the incumbent promoters at the expense of the company's and by extension of shareholders' funds. That the earnings per share is boosted in the process is only incidental.

A company buying its own shares sends out the signal that growth opportunities have dried up. In the event, it would be incongruous if a company which has bought back its shares accesses the primary market again albeit after the statutory cooling off period.

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

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