The Hindu Business Line : A leaf from FIFO logic to identify sold shares

Your query obviously has relevance to holdings in a depository mode where individual shares lose their identity having become fungible in a homogenous mass. The norm in the scenario is first-in-first-out.

For example, if you had purchased 100 shares which begot a bonus of 100, your current total holdings would be 200 shares. If you sell 150, the first ones — 100 — would be deemed to be out of the original lot for which the actual cost would be known and for the remaining 50 there would be no cost.

Safety net

WHAT is the meaning of the term `safety net' that is used in the context of public issues?

Prakash Arunachalam, Chennai

Hot on the heels of a public issue, the shares are listed in a stock exchange. Sometimes, the market quotation either starts way below the price at which it was offered to the public in the primary market or starts going downhill, sliding below the offer price, after the honeymoon period is over. Often this leads to gullible investors holding the can after deep-pockets and promoters have skimmed the cream. The clamour for safety net has origin in this. The promoters and merchant bankers should stand guard for a given period of time to guarantee to the public at least a price that is equal to the offer price. This clamour is entirely well-founded because a company should not be allowed to charge mindless premium. Having collected premium it becomes incumbent on the merchant banker and the promoters to give the public what the market itself refuses to. But so far this plea has not made any visible impact on SEBI.

FBT scope

UNDER a scheme of remuneration agreed with the union, employees get production incentive if the agreed production target is surpassed. Is this liable to FBT?

Srinivasan, e-mail

No, the scheme of fringe benefit tax (FBT) does not target production incentive at all.

In our project site there is a guest-house which is run by a contractor to whom expenses within the agreed norms are reimbursed. One of the norms is certain payments will also have to be made by the guests. Is this liable to FBT? If yes, on gross or net basis?

Twenty per cent of guest-house expenses incurred by the company would be subjected to FBT of 30 per cent plus surcharge of 10 per cent and education cess of 2 per cent, effectively making FBT 33.66 per cent. Obviously, the amount expended on this account would be the one after considering the portion footed by the guests.

At our project site we have both jeeps and cars. Are both targeted by FBT?

Twenty per cent of expenses on motorcars, including depreciation, would be subjected to 33.66 per cent FBT. The umbrella term `motorcar' may be used by the Department to drag jeeps as well into the tax net. I think it would be wrong to contend that motorcars symbolise luxury and jeeps are down to earth and, therefore, should be kept out of FBT.

We run a hospital at the project site where patients from the village are also looked after.

Are the expenses on the hospital subject to FBT? The lion's share of expenses is of course on employees and their families.

In my view, if the hospital maintains a record of outpatients and claims immunity from FBT on hospital expenses incurred by the company to this extent, it will win the battle, if not at the departmental level certainly at the higher level, because social service has always been recognised a legitimate business expense and it is neither employee welfare expense nor an entertainment expense.

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

S. Murlidharan

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