The Hindu Business Line : Clueless why bonus shares are costless

Financial pundits are unanimous that bonus shares do have a cost and the cost must be found out by the spreading-out principle, which involves computation of weighted average cost of the shares. Simply put, the cost of original shares is spread over on the original as well as bonus shares. Indeed, this was the procedure under the income-tax law also but was given up to foster simplicity in computation. In other words, under the new regime, the entire cost gets loaded on the original shares.

Option writer

What should be the tax treatment of option charges paid to an option writer? Can it be added to the cost of shares?

HemChandra Khanduri, Dehradun

If the buy option is exercised, I think the option charges paid to the option writer can be added to the cost of shares thus acquired because in my view the cost of acquisition contemplated by Section 48 does not specifically rule out addition of this item. Besides, as far as the assessee is concerned, acquisition at the agreed price, which admittedly must have been lower than the market price became possible only because of payment of option charges. In case the purchase option is not exercised, I am afraid the option charges would go abegging because short-term or long-term capital gains can be computed only on transfer of capital assets. Non-exercise of buy option does not tantamount to transfer. But if one is assessed as a dealer he may be able to get away with these expenses as being integral to his business.

Tax liability calc

For the assessment year (AY) 2006-07, I have business income of Rs 2,80,000, income from house property Rs 24,000, income from other sources Rs 15,000 and agricultural income Rs 1,60,000. Amount invested under Section 80C, Rs 95,000. Tax deducted at source, Rs 23,000. Please advise me as to my tax liability.

Amit, email

Since the aggregate of non-agricultural income exceeds the tax-free limit of Rs 1 lakh and the agricultural income exceeds Rs 5,000, the two must be clubbed only for taxing the non-agricultural income at the rates applicable to the combined income. The combined income is Rs 3,84,000 after granting deduction under Section 80C on which the tax payable at the slab rates is Rs 65,200.

From this, the tax on agricultural income as increased by the tax-free limit of Rs 1 lakh — on Rs 2,60,000 which works out to Rs 28,000 — would be reduced resulting in a gross tax liability of Rs 37,200.

To this a 2 per cent education cess of Rs 744 would be added thus giving rise to a total tax liability of Rs 37,944, of which, you have already discharged Rs 23,000 having been subjected to TDS to this extent.

Company-paid accommodation

How will the perquisite value of company-leased accommodation be calculated for a house in Chennai? My salary is Rs 40,000 per month and my company is paying Rs 7,300 per month to the landlord for the leased accommodation.

The company is not paying me the HRA of Rs 5,000 which I am otherwise entitled to. In addition, the company is recovering Rs 2,000 per month from my salary for the leased accommodation. My understanding is the perquisite should be Rs 7,300 - Rs 7,000 = Rs 300 only. My employer is calculating the perquisite as Rs 8,000 - Rs 2,000 = Rs 6,000 (20 per cent of Rs 40,000 - Rs 2,000) and taxing me. Please clarify.

Jayapal, Chennai

The taxable value of concessional house provided by the employer is actual rent paid by the employer or 20 per cent of your salary, whichever is less, and from this the rent contributed by you would be deducted. The rent for the accommodation paid by the employer is Rs 87,600 on an annualised basis. And 20 per cent of your salary is Rs 96,000. Therefore, the taxable value is Rs 87,600 less Rs 24,000 being the amount recovered from you by your employer, that is, Rs 63,600.

One-by-six criteria

According to 1/6 criteria of the I-T Act, 1961 which was in force earlier, there were six alternative criteria for any assessee to file I-T return. The Finance Act, 2006 has abolished the said criteria. Does it mean that now only an individual having taxable income should file an I-T return?

Vishwas Bagaria, Hyderabad

Not quite. Last year a significant amendment was made to Section 139 dealing with returns. Accordingly, the criterion for filing return, which was hitherto the total income, has morphed to gross total income (GTI).

Thus a senior citizen will have to file his return if his GTI exceeds Rs 1.85 lakh, a young lady will have to file her return if her GTI exceeds Rs 1.35 lakh and other individuals will have to file their returns if their GTI exceeds Rs 1 lakh.

(ASK! Send in your querieson accounting, auditing, corporate law and taxation to ask@thehindu.co.in. Blog at: http://MentorQA.blogspot.com)

S. Murlidharan

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