The Tribune, Chandigarh, India

Tax implications of the Budget
R.N. Lakhotia

The Finance Bill, 2002 provides that there will not be any change in the rates of income-tax for all assessees except the foreign companies who will be liable to tax @ 40 per cent against 48 per cent at present. The 2 per cent surcharge is abolished, but there will be a new IT surcharge of 5 per cent for all taxpayers (excluding individuals and HUF’s etc having a total income upto Rs 60,000) for the financial year relevant to the assessment year (A.Y.) 2003-2004. The important proposed amendments to the Income-Tax Act, 1961 have been analysed below in two parts as per the period or date of their operation. The sections referred to in this Article relate to the IT Act, 1961.

(A) Amendments Effective from the A.Y. 2003-2004.

(1) Casual income exemption withdraw — Sec 10 (3).

Casual income which used to be exempt upto Rs 5,000 will no longer be so exempt.

(2) Taxation of dividends and income re: Units of UTI and Mutual Funds — Sec 10 (33).

It is proposed to revert to the earlier system to taxing dividend in the hands of share holders. Similarly, it is proposed to shift the incidence of tax on to the unit holders of the UTI and Mutual Funds. Thus the companies and the UTI and Mutual Funds will not be liable to pay tax on dividends or income distributed by them on or after 1.4.2002.

(3) Deduction to units in FTZs and 100 per cent EOUs restricted to 90 per cent Sec 10A and 10B.

For only one A.Y. 2003-2004 the deduction of the profits of new industrial undertakings established in Free Trade Zones (FTZs), Software technology parks, electronic hardware technology parks or Special Economic Zones (SEZs) & 100 per cent Export-oriented Units (100 per cent EOUs) eligible to 100 per deduction, will be 90 per cent of such profits.

(4) Modified conditions for accumulation of income, etc of charitable or religious trusts and educational & medical institutions — Sec 10 (23C), 11, 12A.

The accumulation of income of an educational or medical institution or trust, etc will be allowed only for five years. It will not be necessary for them to publish their accounts in a local newspaper. Any payment out of the accumulated income of charitable or religious trusts would not be treated as application of income and would be taxed accordingly. Inter-trust donations would be deemed to be the income of the recipient.

(5) Liberal deduction of interest on loan for self-occupied house — Sec 24.

The deduction in respect of loan taken for acquisition or construction of the self-occupied house, upto Rs 1,50,000 p.a. would be allowed even where the same is completed on or after 1.4.2003, so long as the acquisition or construction is completed within 3 years from the end of the financial year in which the capital was borrowed.

(6) Taxation of non-compete fees and exclusive rights — Sec 28 (vii).

Any sum received or receivable in cash or in kind under an agreement for not carrying out activity in relation to any business or not to share any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique, etc would be taxable under the head “Profits and gains of business or profession”.

(7) Additional machinery on new machinery and plant Sec 32.

A deduction will be allowed of a further 15 per cent of the actual cost of new machinery or plant acquired and installed after 31.3.2002 (i) in the case of a new industrial undertaking in the previous year in which it begins to manufacture or produce any article or thing; or (b) in the case of an existing industrial undertaking in the previous year in which it achieves substantial expansion by way of increase in the installed capacity (existing on the last day of the previous year commencing on or after 31.3.2002) by not less than 15 per cent.

(8) Increased presumptive income for truck owners — Sec 44AE..

The presumed income per vehicle for owners of heavy goods vehicles will be Rs 3,500 p.m. in place of Rs 2,000 p.m. and for owners of light goods vehicles it will be Rs 3,150 p.m. per vehicle as against the existing Rs 1,800 p.m. at present.

(9) Computation of capital gains in real estate transactions — new S. 50C.

Where the consideration declared to be received or accruing as a result of the transfer of land or building, or both, is less than the value adopted or assessed by any authority of a state government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed would be deemed to be the full value of the consideration and capital gains would be computed accordingly.

(10) Modifications re: long-term capital loss — Sec 70 and 74.

Long-term capital los will be allowed to be set off only against long-term capital gains. Similarly, a long-term capital loss would be allowed to be carried forward separately for 8 years to be set off only against long-term capital gains.

(11) Higher deduction for hotels and tour operators’ foreign exchange earnings – Sec 80 HHD.

For the assessment year 2002-2004, 25 per cent of profits from services to foreign tourists, and further 25 per cent of such profits, as are transferred to the reserve, would be allowed deduction to hotels & tour operators as against 40 per cent. For the A.Y. 2004-2005 the overall deduction would be 30 per cent in place of 20 per cent.

(12) Tax holiday for multiplex theatres and convention centres — Sec 801B.

50 per cent deduction would be allowed for a period of 5 years from the profits of the business building, owning and operating a multiplex theatre of prescribed norms in cities other than Delhi, Chennai, Kolkata & Mumbai, if it is constructed during 1.4.2002 and 31.3.2005. It starts from the date of commercial operation. Similarly 50 per cent deduction for 5 years would be allowed from the profits of the business of building, owning and operating a convention centre of prescribed norms, if it is constructed during 1.4.2002 to 31.3.2005.

(13) Lower tax rebate — Sec 88.

For persons having gross total income above Rs 1,50,000 but not more than Rs 5 lakh, the tax rebate would be @ 10 per cent only. It will not be available in case of persons having gross total income more than Rs 5 lakh.

(14) Miscellaneous:

(a) Many less important exemptions like tax on income of foreigners, sports bodies, etc withdrawn. (b) Higher deduction for provision of bad and doubtful debts of banks allowed.

(d) Inter-corporate dividends to get deduction u/s 80M.

(e) Concession tax @ 10 per cent on income of open-ended equity oriented fund of UTI or MP., (f) Penalty provisions amended.

(B) Amendments Effective from other dates.

(i) No reopening of old assessments as per S. 14A

From 11.5.01 S. 14A is being amended to provide that the Assessing Officer should not reassess the cases, etc for any A.Y. beginning on or before 1.4.01.

(ii) perquisites not to be taxed for 1 year for low-paid salaried employees — Sec 17 (2) proviso.

All perquisites in kind in case of employees whose income under the head ‘Salaries’ does not exceed Rs 1 lakh for the A.Y. 2002-03 only will not be liable to tax.

(iii) Lower deduction on partners’ capital — Sec (b) (iv)

From 1.6.02 a partnership firm will be eligible to deduct interest on the capital of partners only @ 12 per cent.

(iv) Rationalisation of MAT — Sec 115 JA & 115 JB.

Where the tax liability of company is less than 7.5 per cent of the book profits, such book profits would be deemed to be “total income” chargeable to tax @ 7½ per cent. This is effective from 1.4.2001.

(v) Rationalisation of provisions re: search and seizure — Sec 132, 132B.

Clarificatory amendments, etc have been made to apply in relation to a Search initiated or requisition made on or after 1.6.02.

(vi) Power to impound books during survey — Sec 133A.

Books of account or other documents can be retained during survey for 15 days without the approval of CCIT, etc.

(vii) Limited scrutiny u/s 143 permitted.

For getting proof in support of the claim for any loss, exemption, etc an Assessing Officer, from 1.6.02, would be permitted to do limited scrutiny of such issues.

(viii) Credit for TDS — 155 (14)

Where credit for TDS has not been given in any assessment/intimation, due to non-receipt of the certificate of TDS, credit would now be allowed if such certificate is produced before the AO within 2 years from the end of the A.Y. concerned.

HOW I STARTED
Provide professional service to customers

Ludhiana
Though the global recession has hit badly the Information Technology sector, besides other sectors, but entrepreneurs like Mr Sanjay Shroff, 40, here, have developed some innovative strategies to survive in these turbulent times.

He claims, “My simple mantra to beat the slump in market is to develop continuously innovative services by thoroughly studying the customers’ needs. I try to win their faith by providing low cost solutions.” An engineering graduate in electronics from Birla Institute of Technology, Ranchi, Mr Sanjay has crossed many milestones in his way to achieve his goal of a professional service provider in information technology. Today he is lending his expertise to 11 computer education centres in schools, besides rendering consultancy, software and hardware sales services and good money. Sharing his career experiences, he says:

Initial phase in career

After graduating from BITS, Ranchi in 1983, I started my career with Tisco. Later I worked for the Modis, Goenka and RPG enterprises in the middle rank positions in plant maintenance. It provided me an opportunity to travel a lot and to work on various technologies. In early nineties, when I was working at Srinagar, I was forced to come back to my home town, due to deteriorating law and order situation in Kashmir.

How did I enter present business?

I worked for about three years with a computer company, which provided me a greater exposure in sales and customer service. During that time, I realised that there was no good company to provide basic computer education and after sales services. The big companies, to my surprise, lacked trained and dedicated manpower, so I decided to step in and started Educom Hitech India company to provide computer education and SS Hitech India for consultancy and sales services by 1996.

What were the problems faced during the initial phase of career?

It was a great challenge to win goodwill of the customers. However, my dedication and hard work, disciplined life during my student life helped me make a rapport with them. Since my father was a lawyer by profession, so I had to bank upon my efforts. I started with just Rs 10,000. I got first order of Rs 15,000 to train the staff of a local firm. After that I never looked back. The customers used to delay the payments initially, but once I established my name, I was able to demand payments in advance.

Secret of success

I feel that my unquenchable thirst for knowledge, vision to provide application based solutions to the customers are my competitive edge over the others. The mission of my time is not only to make money but provide professional, tailor made service at an affordable price. At our computer education centres, our emphasis is on the practical aspects of the learning rather than just teaching theoretical knowledge according to the PSEB or CBSE syllabus. All the teachers of the schools are involved in this moment. More than 30 per cent of our students have already joined professional computer courses or as their career.

Scope of computer education

The era of fast growth of this sector, I feel, has passed now. It may gain momentum if we witness convergence of this field with other areas with the up-gradation of technology. At the moment, it looks that it is just like other professions such as MBA or Engineering. However, I feel that the demand for specialised computer education and products would increase in the next two-three years.

The government should, however, concentrate on the application of the technology in new areas such as retail business, agriculture and small scale units to give a boost to this sector. We will have to emphasise on the development of new uses of the technology to raise standard of life and to generate new avenues in the field.
(as told to Manoj Kumar)

CHECK OUT

Be fair in assessment of loss suffered by insurer
Pushpa Girimaji

Following the devastating earthquake in Gujarat, the Union Government had instructed insurance companies to expedite settlement of insurance claims by those affected by the earthquake. A similar directive is required to be issued to insurers now in respect of claims of victims of communal carnage there. Of course, no amount of money can really compensate those who have lost their near and dear ones, but it can at least help them re-build their lives or re-start their businesses destroyed in the rampage, provided of course they have an insurance against such an eventuality.

In circumstances such as this, one expects the insurer to be not only quick in indemnifying the loss suffered by the insured, but also fair in the assessment of the loss suffered. But unfortunately, that may not be so in all cases and it is in this context that I would like to narrate an important recent decision of the apex consumer court.

The case pertains to Mr R.K. Kaul’s two houses in Sringar which were burnt and completely destroyed by terrorists in 1991. As the houses were insured , Mr Kaul sent in the claim form to the insurance company. The surveyor assessed the loss at Rs 2,10,000, but the insurance company offered to pay only Rs 95,000 after deducting 50 per cent towards depreciation and some other deductions.. After accepting this amount under protest, Mr Kaul sought the help of the consumer court for enhancement of the amount.

The District Consumer Disputes Redressal Forum increased the compensation amount by Rs 10,429. The state Consumer Disputes Redressal Commission before which Mr Kaul appealed against this decision, held that the insurer was not justified in reducing the valuation by 50 per cent, particularly when the destruction of the property took place within six months of the commencement of the policy. (The period of insurance was May 23-1991 to May 22, 1992 and the destruction had taken place on July 8, 1991.) It therefore allowed only 25 per cent towards depreciation in the value of the property.

Mr Kaul then filed a revision petition before the National Consumer Disputes Redressal Commission, demanding that the insurer pay the full value of the house as assessed by the surveyor. In support of this claim, he quoted the case of Sitha Vedanayagam vs New India Assurance Company (FA no 620 of 1992, decided on October 19,1994). Of course in this case, the dispute pertained to the valuation of a country boat under the marine insurance policy, where the insurance company had taken the stand that it was bound to pay only the market value of the boat on the date of occurrence of the loss as per the terms of the policy. The National Commission here had held that under Section 29 of the Marine Insurance Act, in case of a ‘valued policy’ where an approved surveyor had assessed the value and the insurance company had accepted it at the time of entering into the contract, both the parties were tied to the valuation on the date of the contract, unless the insurer could prove fraud on the part of the insured at the time of entering the contract or while the value was fixed. Since there was no such allegation of fraud and the date of occurrence of loss was very proximate to the date on which the contract was entered into and the insurer could not show any evidence of a fall in the market value of such boats during that period, the insurer was bound to pay the value of the boat fixed for the contract of insurance, the Commission had said.

Referring to this order of the National Commission, Mr Kaul argued that in this case too, the insurer ought to pay the full value of the property as assessed by the surveyor appointed by the insurer and there was absolutely no justification for calculating 50 per cent or even 25 per cent depreciation in the value of the property, while assessing the loss to the insured. The National Commission, after considering the facts of the case, held that a depreciation of 10 per cent would meet the ends of justice. (R.K.Kaul vs United India Insurance Company and Anr, RP No 1314 of 2000, decided on December 14, 2001)

However, a note of warning here: if the insured is unhappy with the valuation of loss made by the insurer, but is forced to accept the amount because of severe financial constraints, then he or she must inform the insurer in writing either at the time of accepting the amount or immediately after, that the amount is being accepted under protest. In the case of Jogendra Narayan Prasad vs Divisional Manager, Oriental Life Insurance, where a hotel in Vijayawada in Andhra Pradesh was looted and burnt in the disturbances that followed the murder of a Congress (I) MLA from Vijayawada, the consumer court dismissed the insured’s claim for a higher amount on the ground that there was no evidence to establish that he had accepted the insurer’s valuation under protest or was coerced into accepting it.

MARKET SCAN

Interim dividend imbroglio continues
J.C. Anand

In the Union Budget proposals for the financial year 2002-2003 dividend would be taxed in the hands of the receivers at the normal tax rates applicable to them. More than 300 Indian companies sought to escape higher taxation of dividends from equity shares etc. and held board meeting in the first week of March to declare high interim dividends. In many cases these interim dividends were equal to the final dividends issued by these companies for the previous years. This was done to escape higher tax proposed in the new Budget. This would ease tax burden of managements which hold considerable equity shares in the companies under their management.

The Finance Ministry saw into it and told SEBI to ensure that the stock exchanges do not relax the listing agreements of the stock exchanges, according to which a company has to give at least 40 days notice (30 days in the case of Demat shares) for the payment of interim or final dividend. Both the Bombay Stock Exchange and National Stock Exchange have issued notices to these companies requiring them to follow the rules as required by the listing agreements.

This has raised many problems, First in the past stock exchanges have been relaxing this rule. Secondly, according to Section 154 of the Company Law, the notice period of record date of book closure through the media is only seven days. Thirdly, it is stated that according to the Company Act when the Board of Directors of a company decides to issue dividend etc this decision is to be placed before the general meeting of the shareholders, which alone can revoke it. Another problem is that the stock exchanges have no control or authority on unlisted companies. Another issue is that some companies may not relent and persist in their business to issue and pay interim dividend before March 31, would escape with payment of penalties in cash for which there is also a provision in the existing listing agreements?

After the stock exchanges cracked their whip, many of the large companies like Reliance Group companies and the many of the Tata companies have decided to cancel their proposed payment of interim dividends. But some companies and managements still hold on to the interim dividend-board meetings. This week will show how the matter ends. Economic Times has editorially commented that SEBI has acted like a “government’s poodle and not as a watchdog”, SEBI has clearly acted at the government’s behest and not played an independent role. “SEBI’s job is” says Economic Times, “to make sure Stock Exchanges function properly and not to worry about the tax collection”.

Taxing dividends in the hands of the receiver at his income slab rate is really to discourage investments in equity shares. It is also a case of double taxation. It is possible that many companies paying higher dividend may reduce dividend rates and reward the shareholders with the issue of bonus shares. Another possibility is that the investors may sell their holdings, held for more than one year, and pay long-term capital gain @ 10 per cent rather than wait for the dividend income to accrue to them. Experts also advise that the best way to escape heavy dividend tax is to invest in growth oriented schemes of mutual funds instead of equity-based schemes and opt out of the scheme whenever it suits them.

Even though interim dividend decisions may be revoked, it is interesting to know that the interim dividend announcements have indicated which companies are likely to pay dividends in the next financial year as also the probable dividend rate. For instance it is now certain that the Vardhman Group companies and Rallis India, with poor working results during the current financial year, would be now paying their dividends as they were holding board meetings for announcing interim dividends, though now these companies had cancelled their board meetings.