Mukesh Patel.in
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DHOKLA & SAMOSA GET TAX EXEMPTION!

Making of food products is manufacture & export by a 100% EOU can enjoy tax holiday holds ITAT Ahmedabad

If you thought that your favourite dhoklas and samosas were mere gastronomic delights you were mistaken. Infact, if a taxpayer has a 100% export oriented unit (EOU), which is actively engaged in making and exporting the same, he can even enjoy income-tax exemption for the profits earned therefrom under Section 10B of the Income-tax Act.

Upholding the above contention of the taxpayer in the case of Deepkiran Foods Pvt. Ltd. vs. ACIT (30 taxmann.com 99), the Income-tax Appellate Tribunal (ITAT), Ahmedabad has rendered a very interesting decision. In this case, the taxpayer company was a 100% EOU engaged in the business of manufacturing and export of various food products like paratha, samosa, dhokla, idli, dahi vada, fried bhindi, pani puri, mint chutney etc. It claimed total exemption in respect of the profits earned under Section 10B. The Assessing Officer was of the view that preparation of eatable items by the taxpayer in its mechanized kitchen did not amount to manufacture or production within the meaning of the said section and, therefore, it was not eligible for exemption. The Commissioner (Appeals) upheld the view of the Assessing Officer and hence the matter was taken in second appeal before the ITAT.

Analyzing the facts of the case, the ITAT noted that the taxpayer held factory license for its 100% EOU unit for manufacture and export of food. Its factory premises were also licensed under Section 58 of the Customs Act, 1953 as a Private Bonded Warehouse for storing and manufacturing of food items. The value of plant and machinery and electrical installations as per the audited balance sheet was in excess of Rs. 20 crores, and the number of workers employed in its factory were in excess of 2000. The Tribunal observed that these facts had not been controverted by the revenue by bringing any contrary material on record and therefore the undisputed factual position was that the taxpayer unit was an industrial undertaking. (more…)

FESTIVE CHEER FOR EMPLOYEES!

Any gift within the value of Rs.5,000 by an employer on a ceremonial occasion is tax exempt for his employees!

The noted Sufi writer Idries Shah once remarked, “If you give what can be taken, you are not really giving.” If you as an employer are trying to think of giving something to your employees during the coming festive season, out of which even the Taxman cannot take anything, here is a smart idea!

Rule 3(7)(iv) of the Income-tax Rules relating to valuation of perquisites provides that, “the value of any gift, or voucher, or token in lieu of which such gift may be received by the employee or by member of his household on ceremonial occasions or otherwise from the employer shall be determined as the sum equal to the amount of such gift. However, where the value of such gift, voucher or token, as the case may be, is below Rs.5,000 in the aggregate during the previous year, the value of perquisite shall be taken as nil.” (more…)

CAN THE HUF SUN RISE WITHOUT A SON?

Courts have held that two male members are a must to constitute an HUF is a myth that must be dispelled!

Under the Direct Tax Laws in our country, a Hindu Undivided Family (HUF) has been granted the status of an independent tax entity. Thus, an HUF has assumed a useful role in personal tax planning.

No doubt, it is true that to constitute an HUF, there should be atleast two members and there cannot be an HUF consisting of a single member, male or female. However, the myth or misconception, that there must be atleast two male members in the family to constitute an HUF as a taxable unit needs to be dispelled.

Courts and Tribunals have categorically held that such profit or income arising from any properties held by an HUF cannot be taxed in the hands of the individual Karta on the ground that he does not have a son in the family. It would be interesting to review the ratio and reasoning of some landmark judicial pronouncements on the subject.

As held by the Supreme Court in the case of ‘Gowli Buddanna vs. CIT’ 60 ITR 293(SC), under Hindu Law, a joint family may consist of a single male member and the Income-tax Act also does not indicate that the HUF as an assessable entity must consist of atleast two male members. (more…)

HRA EXEMPTION FOR RENT PAID TO WIFE

Salaried husband entitled to HRA exemption for rent paid by him as tenant to owner wife” – ITAT Ahmedabad

 

Can a salaried employee legitimately claim the benefit of exemption for House Rent Allowance (HRA) received from his employer, under Section 10(13A) of the Income-tax Act, even in a case where the payment of house rent has been made by him to a member of his own family, say his wife or his father, who is owner of the house and who is also living with him in the same house? Readers will recall that your columnist has replied in the affirmative to this query, in this very column, also expressing the view that this provides a valuable opportunity of ‘tax saving by keeping it within the family.’

Very recently, the Ahmedabad Bench of the Income-tax Appellate Tribunal has, in the case of Bajrang Prasad Ramdharani vs. ACIT (37 taxmann.com 186), also granted its seal of approval to this view, by deciding this very issue in favour of the taxpayer. (more…)

THE LONG & SHORT OF CAPITAL GAINS!

Understanding long term & short term capital gains is important since the same determines its tax treatment !

            The profit or gain arising on the transfer of a capital asset is known as ‘capital gains.’ It is important to ascertain the type of capital gain, as the computation of taxable gains is dependent on the same. Long term capital gains are entitled to concessional tax treatment in comparison to short term capital gains.

            There are two types of capital assets, which give rise to the two respective types of capital gains. Capital assets are classified in the following two categories on the basis of the period for which they have been held by the taxpayer prior to transfer.

            A ‘short term capital asset’ means a capital asset held by a taxpayer for a period of less than 36 months, immediately preceding the date of its transfer. However, in the case of shares of a company, quoted securities and units of the Unit Trust of India or an approved Mutual Fund, the period of 36 months is to be substituted by 12 months.

            A ‘long term capital asset’ means a capital asset which is not a short-term capital asset. In other words, it is an asset held by a taxpayer for a period of more than 36 months. Shares of a company, quoted securities and units of the Unit Trust of India or an approved Mutual Fund are also treated as long term capital assets, if held for more than 12 months. (more…)

EXECUTING YOUR WILL IS SIMPLE!

Useful tax planning can also be achieved for the family through smart distribution of properties under a Will!

Last Monday, we discussed regarding the importance of executing a Will. The drafting and execution of a Will is indeed very simple and you can even do it yourself without any sophisticated legal advice, if you just bear in mind the following key points:

  • A Will can be executed on simple paper and it is not necessary to have any stamp paper or legal paper for the same.

  • No legal jargon is required to prepare a Will. In fact it is desirable that the clear intention of the testator can be understood in clear and simple language.

  • The most important thing in connection with the execution of a Will is attestation of the Will by two witnesses who are present at the time of signature of the testator and who sign as witnesses to the Will. It would be advisable if a person who is beneficiary under the Will does not sign as a witness.

  • The testator should preferably sign each page of the Will and if there are any corrections in the same he should initial them in the margin. If there are too many corrections, it would be better to prepare a new Will. (more…)

TAX FRIENDLY FAMILY ARRANGEMENT

Settlement of family disputes along with strategic tax saving can be usefully achieved via family arrangement!

‘Family Settlement’ or ‘Family Arrangement’ is one of the practical modes of distribution of assets amongst the members of a family, where there are disputes or conflicting claims amongst the family members with reference to family properties.

The Halsbury’s Laws of England’ has defined a family settlement or family arrangement as an agreement between the members of the same family intended to be generally or reasonably for the benefit of the family, either by compromising doubtful or disputed rights or by preserving the family property or peace and security of the family by avoiding litigation.

The advantage of resorting to a family settlement or family arrangement from the tax point of view is that distribution of assets under such a settlement or arrangement is not treated as ‘transfer’ for the purpose of Income-tax Act, as held by various judicial pronouncements and hence it does not attract liability to capital gains tax or gift-tax. Thus, a family settlement or arrangement is a useful mode of tax planning recognized by law. (more…)

STAR TAX BENEFITS OF FMPs!

Multiple indexation under Fixed Maturity Plans (FMPs) offer tax free return on investment plus future tax cuts! 

Saraswat had invested Rs.40,00,000 in March, 2012 in a 13 months Fixed Maturity Plan (FMP) offered by a leading Mutual Fund. The return on investment upon maturity of this FMP in April, 2013 works out to 11% per annum and accordingly Saraswat is fortunate to earn Rs.4,40,000. The real icing on the cake is that this 11% annualized return is reaped by him totally tax free. How does this work?

Saraswat’s return on FMP investment over the holding period of more than 12 months qualifies as Long term Capital Gains (LTCG) and is entitled to enjoy the double indexation benefit. The Cost Inflation Index (CII) for FY 2011-12 was 785 and for FY 2013-14 is 939. On the basis of the same, against his cost of Rs.40,00,000 in 2011-12, the indexed cost would work out to Rs.47,84,713. Keeping in view the maturity consideration of Rs.44,40,000 received by Saraswat, he is in a position to show a notional loss of Rs.3,44,713. Thus on his actual return of Rs.4,40,000, not only will his income tax liability effectively work out to zero, but he will also enjoy the benefit of setting off the notional long term capital loss of Rs.3,44,713 against any taxable LTCG earned by him in FY 2013-14 or thereafter and thus avail a further tax saving of Rs.71,011 (computed @ 20.6% on 3,44,713). (more…)

GIFT OF BMW NOT TAXABLE?

With only nine gifts in kind covered in the specified list, you can still enjoy receiving many more tax-free gifts!

Two interesting readers’ queries relating to taxability of gifts as income have been discussed in the write-up today.

TAXABILITY OF GIFTS IN KIND

Query:  I am expecting to receive a BMW car worth Rs.50 lakhs from a dear friend of mine. Would this attract any income-tax liability in my hands?

Reply:  Section 56(2)(vi) of the Income-tax Act as introduced in with effect from 1st April, 2006 had cast income-tax liability in respect of a ‘gift of any sum of money exceeding Rs.50,000’. In view of this clear language, any gift received in kind (not being any sum of money) clearly fell outside the liability for income-tax, irrespective of the value of such gift.

However, as per the provisions of Section 56(2)(vii), introduced with effect  from 1st October, 2009, the market value of nine specified properties as mentioned hereunder, received as a gift by an Individual or HUF, if exceeding Rs.50,000, is liable to be taxed as income from other sources.

  1. Land and building;

  2. Shares and securities;

  3. Jewellery;

  4. Archaeological collections;

  5. Drawings;

  6. Paintings;

  7. Sculptures;

  8. Any work of art;

  9. Bullion.

 Since motor car is not covered in the list of nine specified properties above, you can safely receive the gift of BMW from your friend, notwithstanding the fact that its value is Rs.50 lakhs. Interestingly, a host of other valuables such as cell phones, computers, electronics, furniture, air tickets, hotel vouchers, etc. have also been kept out of the tax purview and taxpayers can thus enjoy the luxury of receiving such gifts without attracting any liability to income-tax. (more…)

NO TAX TENSION FOR PENSION!

U.K. Govt. pension & U.S. social security tax exempt, family pension of widows earns standard deduction!

        Some interesting issues relating to taxability of receipt of commuted pension by specified employees, leave salary and family pension etc. received by legal heirs of a deceased employee and Public Pensions/Social Security payments received from abroad by Indian Residents, covered in the write up today, will be of readers’ interest and useful reference.   

     Under the provisions of Section 10(10A), any commuted pension received by any employee of the Government, local authority or statutory corporation is wholly exempt from tax. In respect of a non-Government employee, payment arising in commutation of pension received is exempt to the extent of the commuted value of one-third of the pension, in case he is entitled to receive gratuity and one-half of such pension in any other case. (more…)

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