Loss of deposit - whether deductible

QUESTION: Many of the depositors in non-banking financial institutions are in a bad plight losing both interest as well as principal. In the hands of the investors, the interest amount is assessable under the head `other sources' and not from business, so that the loss, it appears, cannot be set off against other income. In some cases where interest had not been received, but had been offered for tax, is it possible to claim the loss of the principal or at least claim as loss the interest, which had been offered earlier. At least, the second alternative should be available to the taxpayers.

ANSWER: In the case of investors, loss of the principal amount is not admissible at all. There is no provision for claiming the interest, which had been offered for tax on accrual basis in an earlier year as a loss now.

In view of the widespread hardship of the taxpayers losing substantial amounts in many of these finance companies, it is unfortunate that such loss is not admissible under the present law, unless the deposits had been made in the business of money lending or dealing in investments. The fact that they are called upon to pay tax out of pension or their other income without considering the loss is a hardship but cannot be resolved under the present law, because of the strict dichotomy between capital and income receipts on one hand and capital and revenue expenditure on the other.

Anomalies in TDS on salaries

Q: I am a senior officer in Central Government, but in a department unfamiliar with tax deduction at source. In spite of my repeated requests TDS is not deducted uniformly, if deducted at all, the result is that no tax was deducted from my salary amounting to about Rs. 23,000 a month till December, while from my December salary, the entire tax for earlier months was deducted, so that I was left with a pittance of Rs. 81 after TDS, loan recovery etc. What is the remedy against such erratic deduction? Should not there be any monitoring by the Income-tax Department penalising such disbursing officers?

A: There was certainly failure on the part of the disbursing officer, since he has not discharged his duty under Sec. 192 of the Income-tax Act, which requires tax deduction at the time of payment ``on the estimated income of the assessee under this head for that financial year". But since the deduction is not at a flat rate, but on the estimated income, strict uniformity of deduction may not be possible.

Probably it is for this reason that there is no special provision dealing with such erratic behaviour on the part of officers disbursing salary or pension. At any rate, the beneficiary of such erratic or non-deduction cannot possibly complain, because it is the Revenue, which has to put up with the delay. The law, at present, in respect of salaries penalises only non-deduction or lesser deduction reckoned as at the end of the year. Probably Income-tax Department could only caution the disbursing officers to avoid such erratic behaviour.

Benefit of double tax avoidance agreement

Q: The Union Government and the New Zealand Government have entered into an agreement for avoidance of double taxation with respect to taxes on income. According to this agreement, if a resident of India has an income by way of interest from sources in New Zealand, he has to pay tax at 10 per cent to the New Zealand Government. I request to be informed if after paying tax in New Zealand, I will have to pay any further tax in India on the balance amount. If so, what will be the rate of tax to be paid here.

A: Under Article 11 of the Double Tax Avoidance Agreement between India and New Zealand, interest is taxable only in the country where it arises. But it may be taxable in the other country, if the law provides for such taxation. If it is so taxable in the other country, the tax so charged shall not exceed 15 per cent of the gross amount of interest with the mode of application of this limitation being settled by mutual agreement between the two countries.

In the light of the above provision, if the reader is a non- resident or resident but not ordinarily resident in India during the relevant year, he will be eligible for exclusion of the amount as foreign income under the domestic law in India. If, on the other hand, he is a resident and ordinarily resident, he would be liable for tax on such income in India but such tax on that component of income from interest in New Zealand, if it exceeds 15 per cent, such excess will have to be ignored. If the rate of tax on such interest does not exceed the limit, no part of the tax will be eligible for relief.

It should, therefore, be possible to limit the tax liability to that extent. This is rather a peculiar provision not ordinarily found in the other agreements. This provision however applies only in respect of interest on deposits simpliciter and not where it is received as part of composite business consideration, so that in case of business agreement the relevant Article relating to treatment of business income will have application for business income along with such interest on the basis of the location of permanent establishment.

Accrued interest from reinvestment deposits

Q: I am an assessee under the Income-tax Act, my income being mostly from salary in the slab rate of 20 per cent. I had invested in the year 1994 a sum of Rs. 2 lakhs in a term (seven years) deposit titled as `reinvestment deposit' with a finance company bearing interest at 14 per cent per annum, which is being compounded at quarterly rest and reinvested and added on to the principal amount of the deposit.

Now the deposit is about to mature in the month of February, 2001 (AY 2001-02) and the company has informed me now that TDS will be deducted on the accrued interest of nearly Rs. 2.50 lakhs payable to me on maturity of the deposit. I was quite ignorant of the applicability of TDS on interest. Now the problem is that I could not include the yearly accrued interest in my previous income-tax return, as I did not receive the same in cash. Please enlighten me with your reply.

1. Whether accrued interest, though not received in cash, can be included in the respective yearly returns and if I had included the same, how can I reconcile my income-tax return for 2001-02 with that of TDS certificate which shows an amount of Rs. 2.50 lakhs having been paid to me as interest and Rs. 25,000 tax deducted.

Can I request to the assessing officer a spread over as is allowed in the case of salary received in arrears.

A: It could probably be inferred with reference to the scheme under which the deposit is made, that the compounded interest accrues from year to year. If that were the inference, tax deduction should have also been made on that basis as is generally done in the case of cumulative bank deposits. Now that it has not been done, the Income-tax Department is likely to accept the tax on cash basis in the year of receipt.

The law which permitted spread over of interest in respect of interest on securities in the relevant years under Sec. 89(2) was omitted by Finance Act, 1988 with effect from April 1, 1989. Since there is tax liability, the reader cannot also file Form 15H and avoid tax deduction at source.

It should be equally permissible, if the amount is offered in respective years by filing past returns requiring regularisation on the part of the assessing officer by issue of notices under Sec. 148. But then the assessee would be liable for interest on the tax so payable under Sec. 234B and 234C for non-payment of advance-tax, if there is advance tax liability and interest under Sec. 234A, if he had not filed the return in time for the respective years.

As for the other problem as to whether income could be so spread over, when the TDS certificate is a current one, such a problem can be anticipated, because of the wrong interpretation by some officers, of Sec. 199, which provides for tax credit in the assessment year `for which such income is assessable'. But this is an enabling provision which permits credit in the year in which the amount is assessable, though TDS certificate itself might relate to a different year of deduction. Sec. 199 does not determine the year of assessment, since it is not part of computation provisions.

Hence, this need not be a bar, if spread over is availed by offering the respective incomes in the relevant years. Certificate of tax deduction can then be treated as a consolidated tax deduction certificate for more than one year, so that credit can be given for different years for which the income is offered with reference to such certificate.

Relief for husbands with unemployed wife

Q: Kudos to Mr. T. Seetharaman for his timely letter titled `Tax Concession' (The Hindu dated December 28, 2000). The Government has provided a tax concession of Rs. 5,000 under income-tax to the female salaried employees considering various factors. As has been rightly said in the case of families, where the male alone is salaried and his female partner a house wife, the entire source of income is only from a single person and the family has to depend only on the single member earning for their requirements.

The family with only a single earning member is not provided with any concession of income-tax, whereas the opportunity is given to families, where both husband and wife are employed. Further in these days of rising prices, the present exemption limit for individuals must be raised to at least Rs. 60,000.

May I appeal to the Union Finance Minister to kindly consider and give some concession in income-tax to those families with single male earning member from the assessment year 2000-01.

A: The reader has raised an interesting question that relief for the employed wife is a concession which discriminates against the families, where wife is unemployed. But her suggestion for raising the limit as a solution would hardly answer her grievance, because the higher exemption limit would benefit even families with employed family members, unless raising of the limit is not for all, but only for those families with single male earning member. It is a matter of State policy.

Probably automatic pooling of earnings of all members of the family with unit system, which divides the income as between members for application of slab rates for each unit, as recommended by Kaldor, would avoid the kind of discrimination pointed out by the reader.

What is the extent of jewellery not treated as unaccounted?

Q: We understand that `Stree Dhan' jewellery received (30 years ago no proof) at the marriage by a Hindu woman is not `undisclosed income' and 500 gm of gold is exempted for each married women as per rules/circulars (even in a raid). Is this correct?

A: The reader is right in his inference that jewellery to the extent of 500 gm of gold is accepted as being outside the scope of seizure in an income-tax search, even where there is no proof of acquisition out of accounted sources. Reference is obviously to the Board's Instruction No. 1960 dated May 11, 1994.

Search parties, who come across items of jewellery adopt guidelines in the instruction for purposes of seizure, so that any excess jewellery available over and above the limits during search would be liable for seizure, unless they are explained, as for example with reference to the wealth-tax return already filed by them or proof of purchase and source thereof. The instruction assumes a normal holding, which may not be readily inferred as unaccounted wealth. The limits as specified are 500 gm per married lady, 250 gm per unmarried lady and 100 gm per male member.

A larger holding need not be taken as necessarily unaccounted in every case, since a larger limit may be justified with reference to the status of the family, extent of past income, the habit of hoarding of the families in that region/ community etc. Ownership of such jewellery since past many years may be capable of being proved from family albums, past jewel loans etc. Jewels received at the time of marriage 30 years ago should ordinarily be capable of being explained. Where there is possession in excess over the limits specified, they may be seized, if treated as unaccounted, but they may not be necessarily assessed, if later explained, either partly or fully. Jewels are bound to be returned, if source is explained or where unexplained also on payment of tax. The burden of proof in such cases is, however, on the taxpayer.

Tax on terminal benefits

Q: Your clarification as to the taxation of terminal benefits in The Hindu dated December 7, 2000 has been extremely useful. You have not referred to the treatment of payment from provident fund especially where the net amount is less because of the adjustment for past loans. You have also not referred to the exemption available under VRS. State Bank of India has announced a scheme which excludes certain classes of employees so that there is doubt whether the higher exemption limit of VRS would have application in the light of the requirement for exemption.

A: What is received back from approved or recognised provident fund is exempt under Sec. 10(11) and 10(12) respectively, while payment from approved superannuation fund is exempt under Sec. 10(13). Hence the question of any adjustment for loan from such payment does not arise. Loan was not income and so is the balance of payment, since the entire amount due is exempt.

As regards the payment under voluntary retirement scheme it should satisfy the conditions therefor subject to the ceiling of Rs. 5 lakhs. Rule 2BA(ii) providing for higher exemption limit of Rs. 5 lakhs requires that the Scheme should cover all employees by whatever name called including workers and executives of the company. It should probably present a problem, unless it is sorted out by the Board, which could relax the conditions, which it has imposed under its rule-making power delegated under the proviso to Sec. 10(10C) of the Act. This should be forthcoming in due course, since a large number of employees are expected to avail the scheme and they cannot possibly be exposed to the denial of tax relief available under Sec. 10(10C).

S. Rajaratnam

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