The Hindu Business Line : Accounting for a reduction in liability

In case a company is asked to make a settlement through a legal edict with its suppliers towards the outstandings that results in a substantial reduction in liability, what would be the accounting treatment?

Swamiyappan, Chennai

There won’t be any material difference in the accounting treatment of write back vis-À-vis the treatment given to cash discount. Cash discount goes to swell the current profits. So would the write back off a liability.

Tax planning

Can one avoid tax on NSS 1987 by investing the proceeds under Section 80C and can one avoid tax on capital gains earned on delisting of shares by investing under Section 54EC?

Laxman Pai, email

The answer to both the queries is in the affirmative.

The Section 80C deduction is shut out only to long-term capital gains suffering tax under Section 112 at a flat rate of 10 per cent or 20 per cent as the case may be.

Section 54EC benefit is available to all types of long-term capital gains and I take it that the shares in question were sold to the promoters on delisting after being held for more than 12 months.

Religious trust

Ours is an unregistered religious trust started with a corpus of Rs 50,000. During the previous year in question it received Rs 50,000 as donation and Rs 10,000 as interest. What would be its tax liability?

Kunchithapadam, email

Since the trust is not registered, its income would be taxable in its status as an AOP (association of persons) attracting a maximum marginal rate of tax, which is 30 per cent.

While its interest would definitely be taxable as its income from ‘other sources’, the treatment of donations by way of voluntary contributions by outsiders is amenable to diverse opinions.

My own feeling, however, is exemption from tax for voluntary contributions with a specific instruction that such contributions are towards the corpus of the trust is on only for registered trusts. In the event, the trust may have to pay tax at the maximum marginal rate on its income of Rs 60,000.

S. MURLIDHARAN

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