Tuesday, September 22, 2009


(Chartered Accountant)

Query 1]
I want some clarification of Scope of section 40A (3) (As amended by the Finance Act-2008).
In the below mentioned case, if payment in a day of more than Rs. 20000 is made but against different LR/Bill, Whether It will be allowed or disallowed while computing taxable income of a company: -

Payee: Sai Transport
Bill / LR No.
Amt. Rs.
10 am
25th Sept
3 pm
25th Sept
Total payment made in a day is Rs. 33,000/- (Rs. 15000/-against Bill No. 1 & Rs. 18,000/- against Bill No. 2 at different time. Please give your comment considering scope of section 40A (3)? [sunil.kalbande@bilt.com]
Expenditure & payment of that expenditure in cash exceeding Rs. 20,000/- is necessary for disallowance u/s 40A(3).
Section 40A(3) of the Income Tax Act, 1961 reads as under: -”Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee Cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure.”
We are of the view that no disallowance is attracted in your case. Section 40A(3) is applicable only in respect of an “expenditure” which is in excess of Rs. 20,000/-. In other words, for applicability of section 40A (3), both the bill and the aggregate payment of that bill should exceed Rs. 20,000/-. In the present case, you are making payment against two different bills (none of the bill is exceeding Rs. 20,000/-), the disallowance is unwarranted.
We are of the view that Amendment in section 40A(3) by the Finance Act– 2008 doesn’t cover the above disallowance.

Query 2]
1. Please refer to the last week’s Tax Talk Dated 14th Sept-2009. It is mentioned therein that shares be treated as a capital assets if an assessee do less transactions (delivery based) in shares and hold it for a longer duration. And if shares qualifies as a capital assets, long term capital gain thereon would be tax free u/s 10 (38). But I read some where that if and if STT is paid, than in that case, long term capital gain on shares is considered as exempt u/s 10(38). Please confirm.
2. Another query is of Land. My father purchased land in 1993 at 150/- per sq feet. He died in 2007. Now his legal heirs i.e. we, are going to sell out this land at 15,000/- per sq ft. Does our case come under long term capital gain? If so, can we claim tax exemption u/s 10(38) against capital gain or under any other clauses like shares? If we have to pay tax, then how much per sq ft. tax has to be paid? And to avoid tax, what is the way out? Somebody told us that we can purchase house for the difference amount (amount of capital gain) or Invest in Govt. bond like IDBI Bonds etc? If I already have one house in my name, than can I claim tax benefit for second house purchase? [desai1962@gmail.com]
1. Applicability of section 10(38): Exemption u/s 10(38) is available only on income arising from the transfer of long term capital assets being an EQUITY SHARE of a company or a unit of an equity oriented fund AND where such transfer is subjected to Securities Transactions Tax (STT). So, transfer of shares/Unit not covered by STT Payment, would not qualify for exemption u/s 10(38). Exemption is available only if the shares are capital assets and not merely on the basis of STT Payment. Payment of STT is one of the criteria for exemption u/s 10(38).
2. Capital gain on transfer of Land:a) Your father has purchased the property in the year 1993. You, all the legal heirs, became the owner of the property in the year 2007 on the death of your father. The land would be long term capital assets as the period of holding of that land in your hand shall be reckoned from 1993 and not from the year 2007.b) Long term capital gain on sale of land is not exempt u/s 10(38). Reason elaborated at (1) above.c) The long term capital gain is required to be calculated by deducting the INDEXED cost of acquisition from the amount of sale Consideration (or valued adopted by the Registrar of stamp duty for levy of stamp duty if it is higher than the sale consideration) received on sale of land.The indexed cost of acquisition shall be calculated as under: - Indexed cost of Acquisition =[(Area of the land in sq.ft. * Rs. 150)+ Registration Expenses etc of the land ] * Cost inflation Index (CII) of the Financial Year in which the land is sold / CII for the F.Y. in which the father died.You have not mentioned the months of purchase/sale/death in the absence of which financial year could not ascertained. Accordingly, in the absence of the required data, amount of long term capital gain could not be worked out.d) The amount of long term capital gain as computed above shall be divided amongst the legal heir in the ratio of ownership and is taxable separately in the hands of each legal heir.e) Option to Save Tax: The following two options are available to the legal heirs to save the tax on Long Term Capital Gain arising on transfer of land as under: -i) Exemption Under Section 54F:Invest the amount of Sale consideration ( and not the difference between the sale consideration and the indexed cost as mentioned in the query) received on sale of land for purchase of another house property within a period of 2 years (for construction- 3 years period is permissible) from the date of transfer of the Land. In case the amount is not utilized for purchase/ construction before the due date of filing the return of income of the financial year in which transfer took place, the amount is required to be kept in a “Capital Gain Deposit Account Scheme” with a scheduled bank. Exemption is available only if an assessee does not own more than one residential house property while claiming an exemption u/s 54F.ii) Exemption Under Section 54EC:Invest the amount of Long term Capital Gain in Specified bonds issued by Rural Electrical Corporation (REC) or National Highway Authority of India (NHAI). Investment in other Government bonds/ IDBI bonds would not enable you to save LTCG tax.

Sunday, September 13, 2009


(Chartered Accountant)


Query 1]
Kindly clarify how the limit of Rs. 40 Lacs for compulsory audit of accounts would be applied in case of person doing trading in derivatives? How Sales, Turnover or Gross Receipts is to be calculated in such cases? How the turnover/ sales etc will be calculated in case of intra day trading in equities? Please elaborate the accounting aspects of the transactions. [k_kumar39@hotmail.com]

1. TURNOVER IN CASE OF DERIVATIVES: I] Accounting Aspects: a) In the case of derivatives, transactions are not recorded at the time of purchase/sale. b) Only the initial margin and mark-to-market margins are recorded as and when paid, and the profit or loss on the futures transactions is recorded as an income/expense on squaring up of the transaction or on expiry of the contract. II] Calculation of Turnover: a) The margin paid is certainly not the turnover in the light of its accounting treatment.b) At best, only the difference (profit or loss in the derivatives transaction) can be regarded as turnover. c) The mute question then is – should one net off the profits and losses and is only the net profit or loss to be regarded as the turnover? This does not appear to be proper, as the net profit or loss would not reflect a measure of the actual volume of transactions. d) It should be the Gross differences which would constitute turnover, and not the net differences. The scrip wise gross differences for each maturity should be determined, the negative signs of the losses within a script of each maturity ignored and such losses grossed up with the gains to compute the turnover.e) For Example: If the profit is Rs. 25 Lacs and loss is Rs. 16 Lacs you will be required to get your accounts audited as total turnover for the purpose of section 44AB shall be Rs. 41 Lacs (Gross Difference) and not Rs. 9 Lacs (Net Difference)
2. TURNOVER IN CASE OF INTRA DAY TRADING OF SHARES (Speculative Profit/ Loss): a) The Institute of Chartered Accountants of India in its Guidance Note on Tax Audit under section 44AB of the Income Tax Act, 1961 (Revised 2005 edition) (Para 5.11) has expressed following views in respect of method of determining the turnover in case of intra-day transactions in shares.b) In a speculative transaction, the contract for sale or purchase which is entered into is not completed by giving or receiving delivery so as to result in the sale as per value of contract note. The contract is settled otherwise and squared up by paying out the difference which may be positive or negative figure. As such, in such transaction, the difference amount is ‘turnover’. c) In the case of an assessee doing speculative transactions there can be both positive and negative differences arising by settlement of various such contracts during the year. Each transaction resulting into whether a positive or negative difference is an independent transaction. Further, amount paid on account of negative difference paid is not related to the amount received on account of positive difference. d) Accordingly, the aggregate of both positive and negative differences is to be considered as the turnover of such transactions for determining the liability to audit under section 44AB.

Query 2]
Sir, Will u please advise me on following point;-
1. I do not have a PPF A/c, but my major son has a PPF A/c.
2. Can I deposit the amount in his PPF A/c and seek Income Tax Benefit? My son is not a tax payer. [kaushikpopat@gmail.com]
Yes, you can claim deduction u/s 80C in respect of deposit done by you in the PPF A/c of your major son.

Query 3]
I was holding some share for a period of more than 2 years and then I sold them in the year 2007. I had earned a capital Gain of approx. Rs. 7 Lacs. Now, at the time of assessment, the I.T.O is saying that he would assess the same as business income.
I have read earlier that long term capital gains on shares are fully exempt from income tax if sold through recognized stock exchange and is covered by Securities Transactions Tax payment. I request you to kindly guide me in this matter along with legal provision. [kingloiya@yahoo.com]
It is true that the Long term capital gain on shares on which STT is paid is exempt from income tax U/s 10(38) of the Income Tax Act, 1961.
The key word is “Capital gain”. Capital gain arises on sale of capital assets.
Shares could either be business assets or a capital assets.
If shares are the capital assets, obviously long term capital gain would be exempt u/s 10(38). If, however, it is a business assets, it would be chargeable to tax like other regular business income.
There are no clear cut set of guidelines or principles that distinguishes business assets vis a vis capital assets. Whether shares are a business asset or a capital asset depends upon number of factors.
The prominent factors that play an important role in determining whether it is a business assets or capital assets are: a) Volume/Nature of transactions.b) Intention/Logic behind investments.c) Holding period of shares etcd) Investment of own funds or a borrowed fund.e) Other business activities of the assessee.
Holding period of 2 years is sufficiently appearing to be a longer period to be qualified as a capital asset. If you were doing delivery-based long term investment with low volume of transactions in shares, in that case, the investment in shares could be regarded as capital assets eligible for exemption u/s 10(38).
[VIDE NOTIFICATION NO. 67/2009, DATED 09.09.2009]
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