The Hindu Business Line : FDI versus portfolio investment

FDI takes place in the primary market. The funds go into the company's coffers. Portfolio investment happens in the secondary market that is stock exchanges. The funds obviously do not pour into a company's coffers. It is for this reason that many economists are inclined to favour FDI rather than FII.

From FDI there are multiple benefits like more employment, more taxes, greater availability of goods and services and so on assuming the funds are poured into Greenfield projects and not in a takeover of an existing business.

DURABLE BENEFIT

Are AGM (annual general meeting) expenses allowable?

Siddarth Gupta, email

I see no impediment in allowing AGM expenses under the omnibus Section 37(1) because it is certainly for carrying on the business. AGM being a statutory requirement and there being no durable benefit accruing to the company so as to fail the test of being revenue expenditure.

FREE RESERVES

The provisions of Section 372A of the Companies Act do not apply to loans made by a company to its wholly-owned subsidiary. Would such loans whittle down the amount available for subsequent loans and investments?

Murali Manohar, email

Indeed. The Section says a company can make loans/investments/ guarantees up to 60 per cent of its capital plus free reserves or 100 per cent of its free reserves, whichever is higher.

To wit, let us say a company has Rs 100 crore as capital and Rs 900 crore as free reserves. The comparison is now between Rs 600 crore and Rs 900 crore.

The latter being greater, the company can make inter-corporate loans/investments/guarantees up to Rs 900 crore.

Let us say, it has already invested Rs 850 crore in other companies which leaves only Rs 50 crore for inter-corporate activities.

Now, should it have two loan requests before it - one by its 100 per cent subsidiary for Rs 200 crore and another by an unrelated company for Rs 50 crore - it should first attend to the request of the latter because if it attends to the request of the former first it would have exhausted its quota of Rs 900 crore leaving no scope for the latter. The former is going to get what it asked for anyway because Section 372A leaves it severely alone.

SLUMP SALE

What is a slump sale and what are the tax provisions regulating it?

Kanagalakshmi Rangarajan, email

When a business is sold lock, stock and barrel - without there being any attempt to distinguish between stock-in-trade and other current assets vis-…-vis the fixed assets - for a consolidated or lump-sum consideration, it is said to be a slump sale. Earlier, it was a fertile tax avoidance technique with courts ruling that since no break-up is available there cannot be any tax liability.

This logjam has been broken by insertion of Section 50B, which brings the entire profit to longterm capital gains tax or shortterm capital gains tax according as the undertaking sold was more than 36 months old or less.

TAX AUDIT REPORT

My annual turnover is Rs 51.96 lakh. I have submitted I-T returns including Saral, 3CB and 3CD forms. But they replied saying, "You have submitted incomplete financial statements. You have to submit a copy of the Tax Audited Report as per the I-T Act, 1961 duly audited by a chartered accountant."

Bharat, email

Yes, the department is right. Those recording a turnover in excess of Rs 40 lakh during the year have to get their accounts tax audited and file the tax audit report as well with the return. Please get in touch with a practising chartered accountant. He would do the needful.

TRANSFER OF FUNDS

I returned to India from the US some eight months ago. I want to transfer my funds in the bank account in the US to my bank account in India. Will this be taxable in India?

Shivkumar R. Lund, email

I presume the funds you are referring to emanated out of your salary income there which would have been taxed under the US law.

In any case, remittances are outside the tax net. Income received in India is taxable in India. What you are receiving in India is not the income but the remittance. There is a vital difference between the two.

Relax.

S. MURLIDHARAN

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