The Hindu Business Line : Tax shock after the Singapore trip

MY EMPLOYER granted leave travel concession (LTC) for myself and my family for a trip to Singapore. The travel expenses came to Rs 2 lakh which was fully reimbursed. The accounts department has added the entire amount to my taxable income without giving exemption for LTC in terms of Section 10(5). This would have a huge impact on my tax bill given the fact that I am already in the maximum tax bracket.

Rajesh Tiwari, Mumbai

The Section cited by you vindicates the stand of your accounts department. The exemption is not on if the travel is to a place outside India. In other words, the exchequer does not want to subsidise foreign pleasure jaunts. I take it that you are an Indian citizen and not a foreign national whose travel to his home country is governed by a separate provision.

Single premium policy

WHAT is the status of single-premium insurance policies now that tax rebate under Section 88 has been substituted by deduction from gross total income under Section 80C?

R. Sankaranarayanan, Vallioor

The amount eligible for deduction would be only up to a maximum of 20 per cent of the policy amount. In other words, premium in excess of 20 per cent of the policy amount will fall by the wayside and will not make the grade under Section 80C. The position thus remains unaltered even under the new dispensation, except that what was earlier a rebate is now a deduction. The rationale is also the same — to discourage impetus to policies that are more in the nature of fixed return schemes.

VAT coverage

THE VAT introduced does not cover excise duty. Why?

P. N. Vishwanathan, Bangalore

Ideally, the system of VAT should have been introduced as a comprehensive indirect tax. Unfortunately, what we have is a system of value-added tax that addresses the problem of local sales tax alone. It does not go into the cascading effect of Central sales tax.

It does not address either the cascading effects of Central Excise — the scheme of Cenvat credit is at best a palliative and not a complete cure to the malady of cascading effect. A unified VAT cutting across the entire country, replacing all indirect taxes levied by States as well as the Centre is the consummation to be devoutly wished. But that would be possible in a unitary system and not in a federation where States and the Centre vie for revenue.

Child in college

MYSELF and my husband have admitted our only child to a medical college, whose tuition fees are Rs 2 lakh per annum. Can we both claim the benefit of Section 80C in this regard?

Pratiba Godbole, Kolhapur

Yes you can, provided both of you pay the tuition fee from your separate funds. Assuming you split the tuition fee in such a way that Rs 1 lakh is paid by you and the remaining Rs 1 lakh by your spouse, both of you can deduct Rs 1 lakh each under Section 80C.

The Section prescribes the outer limit for the qualifying amount — Rs 1 lakh. There are no sub-limits.

While the number of children whose fee would qualify under this section is restricted to two, there is no requirement that the entire fee should be paid by either of the spouse. In the event, both of you can claim the benefit to the extent of outgo from your separate funds subject to the overall ceiling of Rs 1 lakh.

Distribution tax

WHY no distribution tax is payable by an Indian company given that it is also a form of dividend?

Shailaja Balasubramaniam, Coimbatore

Section 115-O explicitly states that for the purpose of distribution tax dividend means the ones described in Section 2(22) except clause (e) thereof. A combined reading of clauses (a) and (b) of Section 2(22) makes it clear that bonus shares issued to shareholders is not dividend because there is no release of company's assets. Our income-tax law seems to agree with the common American perception that bonus shares do not significantly add to investors' wealth given the fact that it inherently dilutes the share's worth.

There is only a book entry transferring the amount capitalised from accumulated profits to the share capital of the company.

This however does not mean that every company would be well-advised to resort more to bonus issues than cash dividend. While a cash dividend has only short-term implications, a bonus issue marks a permanent increase to the capital impacting its future servicing.

Profit share

A PERSON acquires a machinery from another on the condition that he would pay 10 per cent of the profit year after year as consideration. Is such payment of share of profit as well as depreciation allowed as a deduction while computing the business income of this person. If yes, will this not amount to a double benefit for him?

P. Jayachandran, Coimbatore

The Supreme Court had long back settled this issue in Travancore Sugars & Chemicals Ltd vs CIT (1966 62 ITR 566), wherein it held that when no definite sum is assured as consideration, and a share of profit is instead payable for infinity, the share of profit payable year after year is not a capital expenditure but revenue eligible for deduction while computing the business income of the assessee.

Thus, there would be no double benefit because there is simply no scope for allowing depreciation in such cases to the user of the asset.

Housing loan deduction

IS both principal and interest on housing loans subject to a ceiling of Rs 1 lakh? Is the ceiling of Rs 10,000 still there under Section 80CCC in respect of pension policies?

Sumitra Srinivasan, e-mail

No, the limit of Rs 1 lakh on repayment of principal of housing loans together with other eligible investments under Section 80C does not apply to the interest element which is governed by Section 24.

As per the Section, on houses which are self-occupied and constructed within three years of taking housing loans, deduction would be confined to a maximum of Rs 1.5 lakh.

As for Section 80CCC, well the ceiling of Rs 10,000 under that section continues. In addition, as per Section 80CCE, the qualifying amount under all the three sections — 80C, 80CCC and 80CCD — shall be confined to Rs 1 lakh.

Thus if you have already exhausted your quota of Rs 1 lakh by contributing to PF, PPF and housing loans, then there would simply be no room for pressing in Section 80CCC deduction.

(ASK! Send in your queries to ask@thehindu.co.in)

S. Murlidharan

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