Market Scan

by J.C. Anand

Nod to Reliance demerger buoys Sensex

The market welcomed the approval of the Reliance Industries demerger scheme by the Bombay High Court with upsurge of Sensex by 161 points. Last Friday, Sensex closed at an all-time high of 9067.28 against the previous day’s close of 8906.31.

The demerger scheme had already been approved as directed by the court on October 21, 2005 in two separate meetings — one of shareholders and the other of the secured and unsecured creditors. The demerger scheme would not only settle the ownership issue between the two Ambani brothers but also benefit the Reliance Industries shareholders.

According to the demerger scheme, the Reliance Industries shareholders would be allotted shares in Reliance Energy, Reliance Capital, Reliance Infocom and Reliance Fuel Management companies. While Reliance Energy and Reliance Capital are listed on the BSE and NSE, Reliance Infocom and Reliance Fuel Management are unlisted.

According to calculations made by a top expert, every shareholder would be allotted (1) seven shares of Reliance Energy (2) 15 shares of Reliance Capital of Rs 10 each against 100 shares in Reliance Industries. In addition, Reliance Industries shareholders would be allotted (3) 100 shares of Rs 5 each of Reliance Infocom and (4) 100 shares of Rs 5 each of Reliance Fuel Management against 100 shares held by a shareholder in Reliance Industries.

The shareholders of Reliance Industries would greatly benefit from this demerger scheme. Reliance Energy shares closed at Rs 656 and Reliance Capital share at Rs 462 and the Reliance Industries at Rs 964. While the market price of Reliance Industries is likely to move down after the implementation of the demerger scheme, Reliance shareholders will gain by the allotment of shares in Reliance Energy, Reliance Infocom and Reliance Capital. Though Reliance Infocom is not yet a listed company, the Reliance Industries investment stands at Rs 15,400 crore in Reliance Communication Venture Ltd. When this company is listed the shareholders would greatly benefit. Reliance Industries is likely to sacrifice a part of the reserves it holds but it will also reduce its liabilities for each of the demerged companies.

The Indian economy is doing well. The Finance Minister has announced that GDP growth this year is likely to be over 7 per cent. According to an analysis made by Kearney Global Business Policy Council (Kearney FDI Capital Confidence Index), India has displaced the USA as the special most-favoured destination for foreign direct investment in the world after China. According to this analysis India is expected to get 42 per cent of the selected offshore functions going overseas over the next three years as compared with 17 per cent for China. China and India are the most-favoured countries for future research and development investments.

Even when Sensex is at its all-time high, long-term investors may invest in Gujarat Alkalies which has strong fundamentals and is quoting at Rs 133 with its PE ratio at Rs 4.5. No profit-booking should be done in Reliance Industries, Larsen and Toubro and Mahindra and Mahindra.

Tax Advice

by S.C. Vasudeva

Both owners can claim income tax
rebate on housing loan

Q.1 I am working in the Railways, I have taken a house construction loan of Rs 6 lakh from SBI @ 8% (fixed) for 15 years with an EMI of Rs 5,750/- p.m. jointly with my wife, working as a mistress in state government, as a co-applicant. Also, the plot is jointly owned by me and my wife.

Now, please, let me know about tax rebate of interest paid as well as the principal amount deposited during the financial year 2005-06. My EMI of repayment has started from April, 2005. Also, let me know whether my wife will also be eligible for the same rebate or not. If yes, then how much.

(SUNIL SHARMA)

A.1 The deduction in respect of interest paid for the construction of a house is allowable under section 24 of the Income Tax Act, 1961 (The Act). However in case the house is meant for self-residence the construction is required to be completed within three years of the end of the financial year in which the amount was borrowed. The maximum amount of deduction allowable in respect interest paid for amount borrowed for a self-occupied house is Rs 1,50,000/-.

In the case of your wife the deduction of the interest paid can be allowed from the income from property in case the funds have been provided by her towards the acquisition of the plot as well as for the construction of the house. Presuming that both these conditions are satisfied in your case, the deduction of interest would be allowable to both of you in the proportion in which the expenditure on the acquisition of plot and the construction of house has been incurred by each one of you. The deduction under section 80C of the Act with regard to the repayment of principal amount shall also be worked out in the same manner as aforesaid.

Can’t be computed

Q.2 I am working in an MNC. Kindly work out my tax liability for the financial year 2005-06 (Assessment year 2006-07) from the following particulars, keeping in view amendments of different sections — 80L, 88 and 88D — and standard deduction under section 16 of the Income Tax Act.

I Annual expected Income: Rs 1,80,000/-

Including

a) HRA: Rs 12,600/-

b) Medical Allowance: Rs 9,440/-

c) Conveyance Allowance: Rs 5,950/-

d) Interest from NSCs purchased: Rs 4,050/-

II Contributions during 2005-06

EPF Rs 12,400/-

PPF Rs 5,00/-

NSCs Rs 30,000/-

(H.L. DEWAN)

A.2 The figures given by you in your query do not indicate house rent paid and the expenditure incurred by you on medical expenses. In the absence of the said information, the tax payable cannot be determined.

HUF member can make will

Q.3 My HUF of which I am the karta was established w.e.f. 01.04.1977. Its members were my wife, and two sons. Recently, my elder son has died. My two sons were Canadian citizens. I have not distributed any property so far which includes my ancestral agriculture land in my name and my house mentioned above in my name. The plot was allotted to me from the defence quota.

I seek the following two clarifications.

(a) Does the widow of the elder son now become automatically member of the HUF?

(b) Do I have to distribute the property while I am still alive?

(c) Can I write a will and have it legally registered so that my HUF’s property gets distributed after my death according to the will?

(d) Can I mention that my portion of the property or the cost it may be donated to a named charitable institute or a medical relief society?

(LT COL S. S. GREWAL )

A.3 The answer to your queries is as under:

(a) Section 6 of the Hindu Succession Act 1956 has been amended recently. According to the amended provisions where a Hindu dies after the commencement of the Hindu Succession (Amendment) Act, 2005, his interest in the property of a joint Hindu family governed by the Mitakshara law, shall devolve by testamentary or interstate succession, as the case may be, under this Act and not by survivorship, and the coparcenary property shall be deemed to have been divided as if a partition had taken place. According to the amended provisions, the position henceforth would be as follows: -

(i) The daughter is allotted the same share as is allotted to a son;

(ii) The share of the pre-deceased son or a pre-deceased daughter, as they would have got had they been alive at the time of Partition, shall be allotted to the surviving child of such pre-deceased son or of such pre-deceased daughter; and

(iii) The share of the pre-deceased child of a pre-deceased son or of a pre-deceased daughter, as such child would have got had he or she been alive at the time of the partition, shall be allotted to the child of such pre-deceased child of the pre-deceased son or a pre-deceased daughter, as the case may be.

The explanation to the section also provides that for this purposes the interest of a Hindu Mitakshara coparcener shall be deemed to be the share in the property that would have been allotted to him if a partition of the property had taken place immediately before his death, irrespective of whether he was entitled to claim partition or not.

In view of the above provisions the surviving child of your pre-deceased son has the same right as your son had in the HUF property.

(b) The partition of the HUF property can be effected by you any time during your life time, if you so desire.

(c) You can make a will of your share of property in the HUF.

(d) You have the right to will your share of property for charity.

MIS a/c to last full term

Q.4 (i) I and my wife are senior citizens. We have invested in Post Office Monthly Income Scheme jointly up to the tune of 4 lakhs individually 60,000/- each. If either of us expires what will be the position regarding continuing of MIS Account which is joint in both the names. Will it remain continued being paid till its date expires.

(ii) My daughter is a voluntary retired person. Her pension and income from other sources comes to Rs 1,60,000/- where is her expenditure limit is 1,35,000/-. Can she save tax by purchasing NSCs up to Rs 25000 or Rs 30000 in the year.

(RANDHIR SHARMA)

A.4 The answer to your queries is as under:

(i) The Post-Office Monthly Income Scheme Account shall continue to be in operation till the expiry of the term and will be operated by the surviving account holder. I do hope that it has been clarified by you at the time of opening the account in joint name that the account can be operated by either of the survivors.

(ii) Your daughter can buy notified National Savings Certificates to the extent of Rs 25,000/- so as to reduce the taxable income to Rs 1,35,000/-, the amount up to which tax is not payable by woman assessees.

Section 80-C

Q.5 (i) Savings up to Rs 1,00,000/- should compulsory be made from taxable income earned during the financial year 2005-2006 u/s 80C or from previous years savings as allowed u/s 88.

(ii) Whether interest accrued on NSC will comes under savings u/s 80 C during the financial year 2005-2006 as it was allowed in u/s 88 ?

(TILAK RAJ)

A.5 The answer to your queries is as under:

(i) The provisions of Section 80 C of the Act do not contain the words ‘out of the chargeable income’. Accordingly, the amount of 1,00,000/- can be invested in specified savings out of your past savings.

(ii) The provisions of section 80 C of the Act as amended provide for the subscription to any such saving certificates as the Central Government may specify by a notification. On a literal interpretations of section 80 C of the Act it may not be possible to get such deduction. However, the provisions of section 88 of the Act having been substituted by section 80 C of the Act, it may be possible to argue for continuance of such deduction.

Deduction admissible

Q.6 For the income tax assessment year 2006-07 can I deduct my HBA accrued interest from my salaried income at source apart from the total savings limit of Rs 1,00,000/-?

(RAJASHYAMALA)

A.6 The interest on house building advance is allowable as deduction against income from house property under section 24 of the Act. The deduction of Rs 1,00,000/- for specified savings is allowable under section 80 C of the Act. Both of them can thus be claimed as deduction from the total income.