The Hindu Business Line : Is P&L account needed before operations commence?

WE ARE a construction company incorporated recently. We don't expect to get any orders for the next two years at least. Meanwhile, we have been incurring routine expenses on salary, and so on, and also earned some interest from bank. Are we obliged to prepare a profit and loss account pending commencement of activities? Can we carry forward these expenses for write off in future?

MB, email

The Institute of Chartered Accountants of India has a lot to say on expenditure incurred during construction period. I doubt though whether the views of the ICAI would be directly relevant to you inasmuch as yours is not a case of expenditure during the construction period. Nevertheless, the views can be tailored to your case mutatis mutandis.

The Institute agrees that publishing a profit and loss account when admittedly there is no revenue producing activity could be misleading. It has, therefore, advised, as an alternative in such cases, preparation of balance-sheet to which a schedule of expenses pending commencement of business must be attached. These expenses must be written off, say, in 3-5 years once the business is commenced. While this is the accounting treatment, there would be no mercy from the tax authorities shown to you. The expenses simply cannot be carried forward as business loss nor can they be set off against income from any other source for the simple reason that only the loss of a business that has been set up is allowed to be carried forward. The final nail in the coffin would be the imposition of tax on the interest income as income from other sources.

Capital gains

I PLAN to sell my residential house in March 2006 and invest the long-term capital gains in specified bonds under Section 54EC within six months as prescribed. Will the capital gains be exempt from tax if I make this investment in August 2006 but give a declaration as to my intention to do so in the income-tax return that I have to file by July 31, 2006?

O. S. Chellamani, Chennai

Unlike Section 54, enshrining another tax shelter scheme, Section 54EC does not allow the stop-gap facility of parking one's capital gains in Capital Gains Accounts Scheme 1988 pending investment in the prescribed avenue — specified bonds. Nor does it allow the liberty of giving a declaration as to your honourable intentions. In the event, even though you have the liberty to invest within six months, you would do well to advance it to the month of July so that when you file your return, you are able to attach proof of investment in the specified bonds. Else, you will have to pay tax on the long-term capital gain and make an application for refund as soon as you make the investment in the specified bonds, which you would appreciate is a cumbrous process.

Premature transfer

I AM a CA student. I have a doubt with reference to Section 80C. Sub-section (5) says if a person transfers his house before the expiry of five years from the end of the financial year in which he obtained possession of the house, not only will he not get deduction for the loans repaid during the year but the deductions allowed earlier on this account would be treated as income of the previous year in which he so transfers his house prematurely. But up till AY 2005-2006, there was a scheme of tax rebate and no deduction from income.

S. Pashupathi, Trichi

The law has not made any transitory provision. Therefore, strictly speaking the law would be inadequate in dealing with cases of premature transfer during the AY 2006-2007 and thereafter if the transferor had earlier obtained tax rebate under Section 88.

The Department would predictably try to make good the omission by adducing the logic that the income on which the tax rebate was obtained earlier should be brought to book. Suppose, a person paid principal aggregating to Rs 50,000 in the previous year 2004-2005 for the house he bought that year out of which Rs 20,000 alone would have made the grade for rebate under Section 88. Now Rs 20,000 would be treated as the income of AY 2006-2007 by the department in case the house is transferred in 2005-2006. But I do agree that there must be an express mechanism to deal with the period of transition.

HRA exemption

I AM a software engineer working for a reputed MNC. I could not submit the proofs to claim exemption on house rent allowance (HRA) to my employer. Can I claim exemption on HRA by submitting proofs to the I-T department while filing my tax returns?

Srinivas, email

Of course you can, given the fact that deduction of tax at source is not the same as assessment. The employer has done his job by taxing you completely on HRA. But you are free to adduce evidence at the stage of assessment. Inconvenient questions may, however, be asked by the assessing officer. For example, why the evidence now provided could not be provided earlier. Any delay in furnishing proof always fuels the suspicion that the documents were subsequently cooked up. But everything depends upon the explanation given by you for not adducing the evidence earlier besides on the quality of evidence.

Service tax scope

I AM in tyre re-treading business, where as much as 75 per cent of the billing is referable to the cost of rubber. Is service tax payable on the entire turnover?

Magesh, email

This column does not deal with indirect taxes. But in my view, service tax is on the notified services.

There is simply no scope for levying service tax on cost of goods. Therefore, you can by all means reduce from your turnover the cost of rubber used in re-treading.

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

S. Murlidharan

More Stories on : Taxation | Accounting Standards | For the Asking | Education

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
What service can CAs do to the community?

Re 1 from March 1

Taxing farm income?

How I wonder...

Is P&L account needed before operations commence?

`Never allow comparisons hurt you'

Will software gobble up the accountant?

Let your skills do the work, not your heads

Horses that pull the plough of economic progress

Cartoon corner