Feb 292016
 

Basic Principles to compute capital gains

When do capital gains arise?

Normally, only revenue receipts are taxable under the Act. Capital receipts are, as a general rule, outside the tax net. As an exception to this general rule, gains arising from the transfer of a capital asset are taxable.

So far as a salaried assessee is concerned, capital gains may normally arise when he sells a house, or agricultural land or shares or jewellery.

Two basic ingredients are for being a receipt as capital gain is:

  • There should be a ‘capital asset’ owned by the assessee, and
  • Such asset should have been ‘transferred‘ during the previous year.

For this purpose, the expressions ‘capital asset’ and ‘transfer have been specifically defined in the Act

What is a capital asset?

The Act gives a wide definition to the expression ‘capital asset’ to the effect that it will mean ‘property of any kind held be an assessee, whether or not connected with his business or profession.’

However it excludes the following assets from the purview of capital assets:

  • Any stock-in-trade, consumable stores or raw materials held for the purpose of the assessee’s business or profession.
  • Personal effect, i.e., movable property (including wearing apparel and furniture, but excluding jewellery, archaeological collection, drawing, painting, sculptures, or any work of an art) held for the personal use by the assessee or any member of his family dependent to him.
  • A motorcar or any other vehicle held for personal use can be brought under the category of personal effect and can’t be taxed as capital gains.
  • Agricultural lands situated in India other than lands situated in urban areas.
  • From the assessment year 2008-09 onward personal effects exclude, in addition to jewellery, (i) archaeological collection, (ii) drawing, (iii) painting, (iv) sculptures, or (v) any work of an art. Hence, there will always be capita gain on transfer of such personal effects.

Mode of computation of capital gain:

The Act provides definite mode for computation of capital gain from transfer of capital asset. The same is enumerated as below

  • Determine whether property transfer is capital assets? If yes, go to step 2.
  • Determine whether your transfer is covered by the definition of – “Transaction not regarded as transfer”. If the transaction is covered under transaction not regarded as transfer then your transaction is tax free and no further computation is required. If not, go to step 3.
  • Determine period of holding of asset. This is required to determine gain arising from transfer is short term or long term.
  • In case of long terms capital assets apply indexation to the cost of assets before computation of capital gain.
  • Compute consideration received out of transfer of asset. Consideration received means net consideration which is available after deducting from full value of the consideration the expenditure incurred wholly and exclusively in connection with the transfer as incurred by transferor. This may include the below mentioned expenses:
    1. Cost of stamp paper purchase
    2. Stamp duty and registration fees
    3. Brokerage and commission paid to the negotiators / agents.
    4. Any legal expenses incurred by the transferor to effect transfer of title.
  • Compute cost of acquisition and cost of improvement. Apply ratio of cost inflation index in suitable cases.
  • Adjust suitably cost with any advance received in past and forfeited as sale was not finally metalized.
  • Compute gain (short term / long term as the case may be)
  • Adjust the above gain with the amount of exemption available under section 54 of the act.

Treatment of capital losses:

The situation may arise where the consideration for transfer is less than the cost of acquisition plus expenses on transfer. This will result you in loss.

Losses from transfer of short term capital asset can be set off against any capital gain (whether long term or short term).

Losses arising from transfer of long term capital asset will be allowed to be set off only against long term capital asset.

Both short term and long term capital loss shall be allowed to carry forward for 8 years.

After carried forward short term capital loss may be set off against any income under the head capital gain – whether it is short term capital gain or long term capital gain.

After carried forward long term capital loss can be set off against long term capital gain.

Feb 232016
 

Valuation of Provision of domestic servant

Rule 3(3) prescribes the mode of the valuation. This perquisite is taxable in the hands of specified employees.

Contents of the sub –rule:

The value of the benefits to the employee (or any member of his household) resulting from the provision by the employer of services of a sweeper, a gardener, a watchmen or a personal attendant, shall be the actual cost to the employer.
The actual cost in such a case shall be the total amount of salary paid or payable by the employer or any other person on his behalf for such services as reduced by any amount paid by the employee for such services.

Thus, sub-rule (3) of rule 3 provides following aspects for valuation of perquisite–

  • The employer must have provided the services of (i) a sweeper, or (ii) a gardener, or (iii) a watchmen, or (iv) a personal attendant,
  • Provision must be provided to the employee or to any member of his household.
  • The value of the perquisite is ‘the actual cost to the employer’.

Domestic servants excluded

The rule specifically mentions only four types of domestic servants. The methods of valuing the perquisite if any other type of the domestic is provided (like a cook, dhobi, baby sitter, etc.) has been left open . Provision of such types of domestic servants may fall under the residuary clauses [rule 3(7) (ix) and shall be taxable perquisite in the case of all employees.

Meaning of ‘personal attendant’

The term ‘personal attendant‘ should not be confused with ‘personal assistant‘. The ‘personal assistant / helper’ is one who assists the employee in the performance of the duties. On the contrary, a personal attendant will have no official chores, and his duty is restricted to ‘attending’ on the employee and looking after his domestic chores ,like supervising the work of other domestic staff, attending to bank work, escorting children of employee to school, etc.

Degree of service by personal attendant is not relevant

The department have clarified that, where the attendant is provide that the residence of the employee, full cost will be taxed as perquisites in the hands of the employee irrespective of the degree of personal service rendered by the attendant to the employee.

Apparently, the clarification seeks to ensure that no claim is made to the effect that the personal attendant was deployed in the employee’s residence only on a part-time basis and that only proportionate cost of the personal service was taxable as perquisite.

Actual cost to employer

The term ‘actual cost to employer’ has specifically has been defined in the sub-rule itself as ‘the total amount of salary paid or payable by the employer or any other person on his behalf for such services.’

If any amount is paid by the employee for such services, it will be deducted.

Apart from salary paid to the servants providing such services, no other addition is required to be made qua any other payments that have been made to such servants.

Case study

An employer provides a sweeper and a personal attendant to a specified employee during the period 1-6-2015 to 31-3-2016. The sweeper was paid salary of Rs. 400 p.m. and the personal attendant was paid salary of Rs. 1200 p.m. by the employer. In addition, the employer paid them bonus of Rs. 2,000 each of the year, and also contribution Rs. 40 p.m. and Rs. 120 p.m. respectively to the provident fund accounts of the sweeper and personal attendant.

In this case, salary and bonus only will have to be taken as ‘salary’, and employer’s contribution to the provident fund is not to be included.

Salary for one year

- Sweeper                                                         -Rs. 4,800
– Personal attendant                                       – Rs. 14,400
– Bonus -2000*2                                             – Rs. 4000

Cost to employer for one year                       – Rs. 23,200

Since the amenity was provided only for 10 months during the previous year, the value of the perquisite will be-
Rs 23,200 * 10/12 = Rs. 19,334

Feb 192016
 

Concessional/interest-free loans from employer

 If an employer grants loan to an employee for personal purposes, and such loans are either interest-free or carry concessional rates of interest (when compare with normal rates generally prevalent), rule 3(7)(i) classifies the resulting benefit as a ‘fringe benefit’ falling under section 17(2)(viii) of the Act.

Contents of the sub-rule – The perquisite is taxable on the following basis-

  • The value of the benefit to the assessee resulting from the provision of interest-free or concessional loan for any purpose made available to the employee or any member of his household during the relevant previous year by the employer or any person on his behalf shall be determined as the sum equal to the interest computed at the rate charged per annum by the State Bank of India, constituted under the State Bank of India Act,1955 as on the 1st day of the relevant previous year in respect of loans for the same purpose advanced by it on the maximum outstanding monthly balance as reduced by the interest ,if any ,actually paid by him or any such member of his household.
  • In the following cases, the perquisite is not chargeable to tax-
    – if such loan is made available for medical treatment in respect of diseases specified in rule 3A (the exemption is however, not applicable to so much of the loan as has been reimburses to the employee under any medical insurance scheme); or
    – where the amount of loans are petty not exceeding in the aggregate Rs.20,000.

A drafting error in the sub-rule

The use of the expression ’during the relevant previous year ‘in the opening part of the sub-rule, if literally interpreted, will mean that the benefit resulting from the provision of interest-free or concessional loan is taxable only once, i.e., for the previous year in which the loan was given by the employer, and not in successding previous year if the loan continues to be outstanding. This was never the intention. Either the expression ‘during the relevant previous year’ should be omitted , or substituted by ‘during the relevant previous year and earlier previous year.’

Thus, for the purpose of computing the value of the benefit resulting from the provision on interest-free or concessional loans, the rule as amended with the effect from 1-4-2004, prescribes the following requirements and aspects:

The loan may have been made available by the employer or any other person on his behalf, The sub-rule states that the loans must have been ’made available’ to the employee or to his household members, by the employer or any other person on his behalf.The loans need not necessarily be ‘granted’ or ‘provided’ by the employer only. No doubt, if the loan is granted or provided by the employer out of his own funds, it would also be a case where the loan has been ‘made available’. In addition, where the employer assists the employee in obtaining a loan from an external source , like standing surety or guarantee for such loans, the case will fall under the category where loan has been ‘made available’.
The loan may be provided to employee or to any member of his household MEMBER OF HOUSEHOLD:

Key principle: In order to constitute a member of a household, there must be some degree of permanence in the stay of the member along with assessee employee. Hence, person like guests and visitors can not constitute as member of a household.

List of member as enumerated under rule 3, explanation (iv) is given below:

 
Certain types of loans are excluded

LOANS FOR MEDICAL TREATMENT – if an employee has taken any loan for treatment of certain prescribed ailments in approved hospitals, the rule provides that no value of such perquisite will be charged to tax.Situation when above exclusion will not be available:However, the provision to the rule stipulates that his exemption will not available to so much of the loan as has been reimbursed to the employee under any medical insurance scheme.

Case:

The employee had taken a loan of Rs.1 lakh for medical treatment. Later gets insurance money of Rs.50,000 in respect of such treatment, the exemption will be available only to the loan component of the balance, viz., Rs.50,000, and the value of the perquisite will be computed at the prescribed rates for the balance amount of Rs.50,000.

Departmental clarification:

The department has clarified that, where medical insurance reimbursement is received, the perquisite value at the prescribed rate shall be charged from the date of reimbursement on the amount reimbursed but not repaid against the outstanding loan taken specifically for this purpose.

PETTY LOANS – where the amount of loans are petty and do not in the aggregate exceed Rs.20,000, there will be no taxable perquisite.

The limit applies to the aggregate of all loans which are petty and which are taken during a particular previous year, either by the employee or a member of his household.

Prescribed rates for loan PRESCRIBED RATES – under the rule , the difference between interest computed at the ‘prescribed rates’ and the interest, if any, actually paid , is to be treated as the value of the perquisite. The ‘prescribed rates‘ for all types of loans have been fixed as rate charged per annum by the State Bank of India as on the 1st day of the relevant previous year , in respect of loans for the same purpose advanced by it.
Method of computation of the value of the perquisite METHOD OF COPUTATION – The balance for each type of loan as on the last day of each month in the financial year must be taken and aggregated, and on the total amount arrived at interest must be calculated for one month at prescribed rate. From the amount so arrived at, the interest if any actually paid should be deducted, so as to arrive at the value of the perquisite

IILUSTRATION – if an employee has taken a loan of Rs. 1 lakh from the employer for medical treatment, and later obtains insurance money of Rs, 50,000-

  1. If he repays Rs. 50,000 to the employer as repayment of loan ,the outstanding loan will be taken as Rs. 50,000;
  2. If he does not utilise any part of the insurance money towards repayment of loan taken from the employer, the outstanding loan may continue to be Rs. 1 lakh;
  • If he repays Rs.30,000 out of the insurance money towards repayment of loan to employer and utilises the balance for some other purpose, the outstanding loan may be taken as Rs.70,000.
Feb 162016
 

Valuation of Holiday facilities provided by employer

This perquisites is taxable in the hands of all employees

Contents of rule 3(7)(ii): The values is as follows

  • The value of traveling, touring, accommodation and any other expenses paid for (or borne or reimbursed) by the employer for any holiday availed of by the employee (or any member of his household) (other than leave travel concession or assistance referred to in rule 2B) shall be determined as the sum equal to the amount of expenditure incurred by the employer in that behalf.
  • Where such facility is maintained by the employer, and is not available uniformity to all employees, the value of the benefit shall be taken to be the value at which such facilities are offered by other agencies to the public.
  • Where the employee is on official tour and the expenses are incurred in respect of any member for his household accompanying him, the amount of expenditure so incurred shall be a fringe benefit or amenity.
  • Where any official tour is extended as a vacation, the value of such fringe benefit will be limited to the expenses incurred in relation to such extended period of stay or vacation.
  • The amount determined as per the above rules shall be reduced by the amount, if any paid or recovered from the employee for such benefit or amenity.

The sub-rule stipulates that where any holiday is availed of by the employees or any member of his household, other than leave travel concession (covered under separate rule naming rule 2B), and the expenses are met by the employer, either directly or by the way of reimbursement, there will be a taxable perquisite.

For the purpose of determining the value of the perquisite, the following aspects need to be considered:

Types of expenses covered The expenses covered under the rule are-

The value of traveling (i.e. expenses for reaching the place of holiday from the place of normal work) – paid for or borne or reimbursed by the employers
The value of touring (expenses on local trips undertaken at the place of holiday) – paid for or borne or reimbursed by the employers
The value of accommodation – paid for or borne or reimbursed by the employers
Any other expenses
Aggregate of all above expenses , less
Any amount paid or recovered from the employee
Types of tour covered The rule speak about two types of tours, viz.,(1) Officials tours, and

(2) Officials tours extended as a vacation.

The following practical situation may arise from the above tours:

OFFICIAL TOURS – The expenses incurred on the employee will not be treated as a perquisite. However, if the employee is accompanied by the members of his family (i.e. his / her spouse), expenses incurred on the members of the family (on travel, local tours and boarding lodging) will be treated as a perquisite.

PRIVATE/HOLIDAY TOURS – In case of purely private/holiday tours all expenses paid for or borne or reimbursed by the employer for any holiday availed of by employee or any member of his household, shall be determined as the sum equal to the amount of expenditure incurred by the employer in that behalf.

When official tour is combined with vacation Expenses on the employee during the vacation period (boarding and lodging and local tours) and all expense for the entire period including official tour period on the members of his household who accompanied him (on travel, local tours and boarding and lodging) will be treated as perquisites.In respect of employee, the rule provides on travel expenses on the employees both ways will not treated as a perquisite.
When a family member (e.g. spouse of employee) accompanies the employee on an official tour The rule specifies that where any holiday facility is provided to any member of the household accompanying the employee on the official tour, it shall be deemed to be a perquisite. All expenses on the accompanying member, if borne by the employer directly or indirectly, will be taxed as a perquisite.

Case Study

  1. A company executive goes on an official tour for five days and returns to headquarters. He is accompanied by the three members of his household. The company meets the expenses comprising (1) train fare at Rs.600 per head both ways, and (2) other expenses at Rs. 650 per head day for 5 days.

In this case, the value of the perquisite will be the expenses incurred on the members of the family only, as follows:

Train fare                            – 600*3             –                Rs.1800

Other expenses                 -650*3*5                              Rs.9750

Value of the perquisite                                                   Rs.11,550

  1. A company executive goes on an official tour for 4 days, and extends it as a vacation for 4 more days before returning to headquarters. He is accompanied by two members of his household. The company meets the expenses comprising (1) Airfare at Rs.2,500 per head to and fro and (2) other expenses at Rs.800 per day per head.

In this case, the value of the perquisite will be the sum total of (1) other expenses of the executive for the vacation period of 4 days, and (2) air fare and other expenses of the members of the family for 8 days.

Airfare on members of the household   -Rs. 2,500*2  –             Rs.5,000

Other expenses on executive                 -800*4        –               Rs.3,200

Other expenses on members of the household

800*2*8                                             –                                  Rs.12,800

Value of perquisite                           –                                   Rs.21,000

Feb 152016
 
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GST SEMINAR

GOODS & SERVICES TAX (GST) + CENVAT CREDIT CASE LAWS + HOW TO HANDLE AUDITS

Friday, 19th February 2016

The initiative of the Government of India to introduce GST has been one of the biggest reforms announcement in indirect tax. The delay in the implementation of GST, which was earlier scheduled to be introduced in April 2016, has given industries in India sufficient time to be well-prepared for this sea-change. The proactive players in the industry are grabbing this opportunity to re-align their business processes with the objective of addressing the cascading effect of today’s indirect tax regime on their bottom line. Antworks Education takes this opportunity to empower industry to get ready for GST through a detailed interactive seminar on GST on 19th February 2016 at Mumbai.

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Feb 032016
 

Due dates for the Month of Feb 2016
5th
Service Tax
- Service Tax payments by Companies for January
Central Excise
- Duty Payment for all Assessees other than SSI Units for January
7th
Income Tax
- TDS Payment for January
10th
Central Excise
- Monthly Return in Form ER-1 (Ann-12) for other than units availing SSI exemption for January
– Monthly Return in Form ER-2 (Ann-13) by 100% EOUs for January
– Montly information relating to principal units in Form ER-6 (Ann – 13AC) for specified assessees for March.
– Exports – Procurement of specified goods from EOU for use in manufacture of Export goods in Form Ann-17B for DTA units, procuring specified goods from EOU for manufacture of export goods.
– Proof of Exports in Form Ann.-19, once in a month for all exporters, exporting goods under Bond
– Export details in Form Ann.-20, for Manufacturing following simplified export procedure.
– Removal of excisable goods at concessional rate in Form Ann. -46 for Manufacturers receiving the excisable goods for specified use at concessional rate of duty in terms of Rules described in Col. 4.
15th
Providend Fund
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21st
ESIC
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MVAT *
– MVAT Monthly Return for January (TAX>1000000/-). If paid in time additional 10 days for uploading e-return.
28th
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Central Excise
– Particulars relating to clearances, electricity load etc., in Form Ann.-4 exceeding the limit of Rs. 90 lakhs of exempted clearances for small scale units availing exemption and whose turnover exceeds or has exceeded Rs. 90 lakhs in a financial year, as the case may be.
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