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I am a commerce graduate. Please demystify the concept of deferred taxation with a simple example.

Sujata Holkar, email

The results shown by two sets of accounts — one for company law purposes and the other for income-tax purposes — prepared can never be the same. The difference in the results, may be profit or loss, can be classified and pigeonholed into two — permanent difference and timing difference.

An example of permanent difference is disallowance under Section 40A(3) of payments in excess of Rs 20,000 in cash. Another example from this species is disallowance of personal expenditure of directors of a company.

You would appreciate that these two disallowances are not going to reverse themselves in future which is why they are described as permanent.

On the contrary, timing differences are those which are going to reverse themselves sooner or later.

For example, let us say the rate of depreciation in accounts for plant and machinery is 5 per cent whereas it is 25 per cent as per the income-tax rules.

In the initial years of use of the machinery, obviously this divergence in rate would give rise to a larger profits in books vis-À-vis the profits shown in the income-tax return but then since the size of the pie — the cost of the machine — is the same for both purposes, in later years of life of this asset, there would be a reversal of results.

In other words, the greater profits shown in initial years would be offset by drop in profits on this account in later years.

That is why this difference is picturesquely and appropriately described as timing difference. And it is to acknowledge this timing difference that the concept of deferred tax came into being.

In the above example, in the books of accounts, provision for deferred tax would be made for the difference and in the later years the heightened depreciation liability in the books would be met out of the aggregate of provision made year after year.

Timing difference can also give rise to deferred tax assets which accountants are exhorted not to acknowledge too readily.

Why has options trading not been permitted in the commodities derivative market?

Padmaja, Chennai

Presumably because of the fear that it could bring about volatility in the market instead of going further in the avowed direction of efficient price discovery. Maybe, the Government is following a calibrated approach in this regard.

You would agree that in the derivatives market, options trading enables one to pitch for larger volumes given the fact that the option premium is but a fraction of the prevailing price of the underlying asset. This may perhaps precipitate matters.

Is it true that derivatives trading in commodities is responsible for the present state of affairs on the food front?

M. K. Tharani Prakash, Chennai

Opinion is sharply divided on this issue. A section of the economists opine that be it oil or commodities market, it is the speculators who are driving up the prices.

Others opine that derivatives trading only reflects futuristically the state of things to come, which is why it is hailed as a price discovery process. Well, the truth as always lies somewhere in between.

Is the TDS regime applicable to a small drama company?

Seema, Bangalore

Your question needs to be addressed from two angles. First, as a small drama company, are you required to deduct tax at source while making the payments coming within the purview of the TDS regime.

Second, being a small drama company, presumably without taxable income, should you nevertheless suffer tax at the point of receipt?

Well, as far as the first issue is concerned, having constituted yourself as a company, you have no option but to deduct tax source wherever required.

Only individuals and HUFs whose annual sales or professional receipts are below Rs 40 lakh or Rs 10 lakh, respectively, have been by and large spared from this tedium.

But you have something to rejoice as far as the second issue is concerned. Your interest from a branch of a bank, for example, would be subjected to TDS only if it exceeds Rs 10,000 per annum.

However, you can obtain a certificate from the assessing officer saying that the company doesn’t have any taxable income and, therefore, no tax need be deducted at source. This certificate would enable you to receive income without being pared down by tax.

I am working with a company which has agreed with a bank to deduct the EMI (equated monthly installment) from my salary and deposit the same with it. I am a party to this agreement. Is my employer required to deduct tax at source under Section 194A?

Manish Kumar Sharma, email

Your employer is not required to do so because the payer of interest is not your employer but you.

Being an individual you are not required to deduct tax at source unless you come within the purview of tax audit by having sales turnover in excess of Rs 40 lakh or professional fees in excess of Rs 10 lakh. I don’t think you are roped into the tax audit regime.

At any rate, banks enjoy immunity from the provisions of Section 194A and, hence, can receive interest without being pared down by tax.

S. MURLIDHARAN

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