The Hindu Business Line : Shouldn't interest be paid on IPO premium

Nope! This indeed is one area which would embarrass economic purists no end because while every factor of production must get a reward from its user, investors in equity capital are left to the tender and capricious mercies of the secondary market.

The argument is investors in equity must not look to the company that has mobilised funds for pecuniary rewards. Instead they must look to the market for capital appreciation.

Those who invest for dividend are laughed at and made fun of. There is no compulsion on payment of dividend. And every company expresses dividend as a percentage of the face value.

Thus if a company issues shares of Rs 10 at Rs 250 and announces 100 per cent dividend, it would translate into a yield of a piffling 4 per cent for the investor in the primary market. SEBI, which has been doing a splendid work in disciplining the secondary market, should now change course and address the glitches in the primary market.

Discontinued profession

I want to know under which head income from discontinued profession will be assessed.

Whether surcharge is leviable on artificial juridical person for AY 2006-07?

Shyam Sundar Gupta, email

It will be taxed as income from business and profession. The rate of surcharge for an artificial juridical person is 10 per cent, irrespective of whether the total income exceeds Rs 8.5 lakh or not.

Beneficial shareholders

A closely held private limited company, `X', has accumulated losses as of March 31, 2005, as under: Assessed business loss of Rs 46,90,216 and unabsorbed depreciation of Rs 4,71,123. The shares of X are held by two individuals `A' and `B' in the ratio of 50:50. Now they have formed another closely held private limited company `Y' as a holding company, in which they are equal shareholders and it is proposed that they want to transfer the shares held in X to Y. Since the beneficial owners in X, that is, A and B, are the continuing shareholders in Y, would the provisions of Section 79 of the I-T Act be applicable? Is it possible to argue that though Y is a corporate entity which will hold shares in X, but by virtue of A and B being the continuing shareholders in Y, the beneficial interest in X is still being held by A and B.

Balasubramaniam, email

It is a plausible argument. It is true that the two shareholders continue to be the beneficial shareholders despite the transfer of their shareholding.

It, however, remains to be seen whether the Department buys this argument. What is clear is the unabsorbed depreciation can be set off in future without any let or disturbance despite this change. This is because, as held by the Supreme Court in Concord Industries case, Section 79 targets only the business loss and not the unabsorbed depreciation.

Service tax component

I had recently been to a studio for developing of a film roll and having the photos printed. I was given a rude shock at the time of taking delivery that I have to bear 10.2 per cent of the total cost towards service tax, when it is a well known fact that service tax can be levied only on the labour value and not on the entire billed value due to a large product value involved for the photographic paper cost.

I am raising this issue since the proprietor of the shop told me that the Central Excise department insisted on collection of service tax on the entire bill value, despite their efforts to break the service and the product value. Such a stand from the Government is regrettable, leading to an unnecessary burden and loss to the public. Is such a move constitutionally valid?

TAP Krishnan, email

When the constitution was amended to permit imposition of sales tax on works contracts, quite a few State governments lapped up the opportunity to tax the entire contractual value, whereas the licence given was for imposing supply only on the labour portion.

It required the Supreme Court, in the Gannon Dunkerley case, to remind the Rajasthan Government of this.

In the context of service tax, the Department, vide Notification No. 12/2003-ST dated June 20, 2003, has conceded that the tax is only on the value of services and not on the value of goods.

But in the specific context of photography services, the Department has botched the whole thing by its letter B.II/1/2000-TRU dated July 9, 2001, which has clarified that the cost of film, and so on, should be shown separately in the invoice and goes on to say that otherwise deduction for the cost of material would not be allowed.

It has also clarified that other cost, such as photograph paper and chemicals, are not allowable as deduction in computing the value of the service. This is clearly untenable.

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

S. Murlidharan

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