The Hindu Business Line : Is there rebate for NSC accrued interest?

Earlier, up to assessment year (AY) 2005-06, rebate was available for NSC accrued interest under Section 88 of the I-T Act. But from this AY 2006-07, the deduction for NSC VIII issue purchase has been notified through a separate notification. But in this notification, NSC accrued interest reinvested during the year has not been included.

Earlier, NSC accrued interest was available for rebate under Section 88 by specific inclusion in the old circular. Can we claim Section 80C deduction on NSC accrued interest reinvested during the year on the basis of the earlier circular in this regard?

Adarsh Prabhu, email

Since interest accrued from year to year is credited to the investor's account without the option to receive it in cash, the presumption is the investor has no option but to recycle the accrued interest in the same instrument. In fact, it is on the aggregate of such principal investment plus the accrued interest that further interest is calculated and the maturity amount determined.

In the event, notification or no notification, the investor in any case qualifies for the tax benefit on the interest portion as well.

The earlier notification, in fact, stated the obvious. That there is no notification under the new regime does not in any way detract from the merit of the contention that investment is made year after year to the extent of accrued interest.

Investor vs dealer

There seems to be a discrimination against investors — the Securities Transactions Tax (STT) paid by them is not allowed as an expense, whereas for dealers it is allowed as a set off against their tax liability. Why is this so?

Lakshmipathy Rao, Mysore

The discrimination referred to by you is entirely well merited because profit from share market for a dealer is not exempt from tax, whereas for an investor, long-term capital gains are completely tax free and short-term gains are taxed at a soft 10 per cent.

In the event, a dealer who shows his share market income under business income is allowed a small benefit — set off of STT against his overall tax liability. The investor should allow dealers to savour this small benefit and not begrudge it.

Finance lease

We are a manufacturing company engaged in the business of chemicals. We want a clarification on the following: We have purchased a ship unloader under a finance lease agreement. Now we are paying the instalments, which comprise both principal and interest, to the lessor. Should we deduct TDS on the payments made to the lessor under any of the Sections of 194, that is, 194A, 194C or 194I? The lessor is contesting on the ground that since it is a financial lease no TDS is required to be deducted.

Anshuman Mishra, email

It is true that AS-19, on accounting for leases, requires the lessee to find out the implicit rate of interest and debit accordingly finance charges year after year during the currency of lease. But this is purely for accounting purposes.

But as far as the lessor is concerned, he did not enter into a money lending transaction with the lessee directly or indirectly so as to warrant the payer of interest to deduct tax at source under Section 194A. In the event, the lessor's contention seems to be well merited.

House matters

Suppose a person invests in another house, within the prescribed period, the long-term capital gain earned from sale of a house, but within three years the new house is compulsorily acquired, will the amount exempted earlier become liable to tax now as short-term capital gain as provided by Section 54 for transfer of replacement house before expiry of three years?

A. Arun Kumar, email

It is true that the definition of the term `transfer' given in Section 2(47) includes compulsory acquisition under any law. But then all the definitions given in Section 2 are prefaced by the words "unless the context otherwise requires". In the context of Section 54, the context definitely requires premature transfer of replacement houses on compulsory acquisition from being exempted from the rigour of that section because the idea behind that section is to deny the sumptuous tax benefit to persons who buy and sell property with gay abandon purely with a speculative motive.

Compulsory acquisition, you would agree, is not a voluntary act much less a speculative one.

TDS on cargo service

Is one required to deduct tax at source on payments to cargo parcel service provider?

K. Kanakadurgai, email

Yes, as per CBDT Circular 715 dated August 8, 1995, where it has opined that carriage of documents, letter, etc., is in the nature of carriage of goods and, therefore, provisions of Section 194C would be attracted.

In short, the implication is there is no material difference whether the item transported is documents or goods.

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

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S. Murlidharan

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