The Hindu Business Line : Crossing the Final tax hurdle

What is a zero coupon bond? State briefly the treatment of zero coupon bonds in the hands of the issuer and the investor under the Income-Tax Act, 1961.

Section 2(48) defines the term "zero coupon bond" as a bond issued by infrastructure capital company or infrastructure capital fund or public sector company on or after June 1, 2005, and in respect of which no payment and benefit is received or receivable before maturity or redemption from the issuer. The bond in order to be treated as zero coupon bond must have been notified by the Central Government in the Official Gazette.

In the case of purchaser or investor interest on transfer of zero coupon bonds is taxable as capital gains. The terms "infrastructure company" and "infrastructure capital fund" are defined in Sections 2(26A) and 2(26B) respectively.

The companies issuing such bonds have to make investment by way of acquiring shares or providing long-term finance to any enterprise or undertaking engaged in the business referred to in Section 80-IA(4), Section 80-IAB (1) or Section 80-IB(10) or a project for construction of a hotel of not less than 3-star category as classified by the Central Government or a project for construction of hospital with at least 100 beds for patients.

HUF in business

A Hindu undivided family (HUF) is carrying on the business of purchase and sale of foodgrains. The karta of the family manages the business. Can the HUF pay salary to the karta and claim the payment made as a deduction from the profits of its business? If so, what are the conditions and limitations for such payment?

An HUF carrying on business is eligible to pay salary to any member or coparcener of the family so long as the payment is reasonable and for compensating the efforts put in by such person. However, if the salary payment is excessive or unreasonable, the assessing officer (AO) may disallow such portion of such payment being excessive or unreasonable.

Section 40A(2)(a) empowers the AO for disallowing the excessive payment or expenditure and Section 40A(2)(b) prescribes the persons for whom such payment is made, which is eligible for such disallowance.

Club's income

ABC Club, a members' club registered as a society under the Orissa State Societies Registration Act, derived surplus from the sale of refreshments, beverages, etc., and letting out rooms to its members. The club provided these facilities and amenities to its members as part of advantage attached to the membership.

The club claims that the said surplus accruing to it is not income at all for the purpose of the Income-Tax Act, 1961. Examine the validity of the claim made by the club. Would your answer be different, if the club was incorporated as a company or if some members alone took advantage of the facilities and amenities it provided?

The club is deriving surplus by rendering services to its members. The surplus so received whether to be taxed or not to be taxed, is to be decided. The apex court, in CIT vs Bankipur Club Ltd (1997 226 ITR 97 SC), held that excess of income over expenditure as a result of mutual arrangement could not be taxed as income. While rendering the judgment it referred to Halsbury's Laws of England (4th edition).This decision was followed in Chelmsford Club vs CIT (2000 243 ITR 89 SC). Hence, whether the club is incorporated or otherwise, if the principle of mutuality is satisfied the income earned by the club from the members is not chargeable to tax. Even if, only certain members have taken advantage of the facilities offered by the club, it would not affect the principle of mutuality.

Capital gains

S, an individual, purchased a site on April 21, 2000, for Rs 2,00,000. He completed construction of a building thereon on February 14, 2003, at a cost of Rs 10,00,000. He sold the property consisting of site and building on December 7, 2005, for Rs 20,00,000. S seeks your opinion on the nature of capital gain arising to him from the sale of the property for the assessment year 2006-07. Computation of capital gain is not necessary.

In this case, the assessee purchased site in the previous year 2000-01 and completed the construction of the building in the financial year 2002-03.

The building was sold on December 7, 2005, for a total consideration of Rs 20 lakh. The land held from April 2000 is a long-term capital asset and the gain arising on transfer is taxable long-term capital gain. The building is owned for less than 36 months preceding the date of transfer, hence, the gain arising there from is chargeable as capital gain.

The taxpayer S is advised to make a sale deed mentioning therein the sale consideration separately towards land and building out of the total consideration of Rs 20 lakh. This would enable the assessee to compute capital gain separately for land and building. This bifurcation of sale consideration towards land and building is recognised by courts in cases such as CIT vs Dr D. L. Ramachandra Rao (1999 236 ITR 51 Madras); CIT vs C. R. Subramanian (1999 242 ITR 342 Karnataka). While apportioning the sale consideration for land and building, the impact of Section 50 C applicable for transfer of immovable property such as land or building or both must be taken note of by the assessee.

Furnishing returns of income

State whether the following persons have to mandatorily furnish their return of income for the assessment year 2006-07:

Mr A, an individual, aged 50 years, whose gross total income before deduction under Section 80C is Rs 1,90,000 and total income after deduction under Section 80C is Rs 95,000.

As per fourth proviso to Section 139(1) from the assessment year 2006-07, every person being an individual or HUF or association of persons (AOP) or body of individuals (BOI) must file the return of income if the total income before giving effect to Section 10A, Section 10B, Section 10BA or chapter VIA exceeded the maximum amount which was not chargeable to tax. In this case, before deduction under Section 80-C, the total income is Rs 1,90,000 (which is more than the basic limit of Rs 1,00,000) hence the assessee must file his return of income, though after deduction under Section 80-C the total income is below the taxable limit.

XYZ, a firm, has incurred a loss.

As per Section 139(1)(a) from the assessment year 2006-07 every firm must file return of income whether or not it has income chargeable to tax under the Act. Therefore, the firm XYZ must mandatorily furnish its return of income for the assessment year 2006-07.

Services rendered abroad

J, a citizen of India, is employed in the Indian embassy at Tokyo, Japan. He received salary and allowances at Tokyo from the Government of India during the year ending March 31, 2006, for services rendered by him in Tokyo. Besides, he was allowed perquisites by the Government. He is a non-resident for the assessment year 2006-07. Examine the taxability of salary, allowances and perquisites in the hands of J for the assessment year 2006-07.

Where a person renders services outside India, normally the income is said to accrue or arise outside India. However, Section 9 covers certain incomes which are deemed to accrue or arise in India, though in reality it accrues or arises outside India. Section 9(1)(iii) says that salary payable by the Government to a citizen of India for services rendered outside India if chargeable to tax under the head "salary", it is taxable in India on deemed basis. Accordingly, income of J employed in the Indian embassy at Tokyo is taxable. However, Section 10(6)(ii), which provides for reciprocal exemption arrangement which may exist for the persons employed in embassy, high commission etc., must be taken note of.

Withdrawal of application

Q, a non-resident, made an application to the Authority for Advance Rulings on January 2, 2006, in relation to a transaction proposed to be undertaken by him. On March 31, 2006, he decides to withdraw the said application. Can he withdraw the application on March 31?

Section 245Q(3) says that an applicant may withdraw an application within 30 days from the date of application. In this case, the application was made on January 2, 2006, and the decision to withdraw application is taken on March 31, 2006, which is beyond the time limit, hence it is not possible to withdraw the application.