Is this a loophole in the IT Act????

1312 views 20 replies

Devendra

Article

72 Points Joined June 2009

Just need to confirm if this is a loophole in the IT Act. Asked my boss but he had no idea of what i was saying.

1. When rent free accomidation is given to an employee it is taxed as a perquisite and TDS deducted thereon. This perquisite is valued on the basis of Rent paid for that accomidation or 15% of Salary( whichever is lower) when the house is not owned by the employer.

So i was auditing this sort of dummy company which dosent do much and the only income is dividend. There i noticed that the company was paying Rent of Rs 300000 per month for a house in which one of the directors was staying, but the company didnt give any salary to the director and so it wasnt taxable as a perquisite in the hands of the director.Is this some sort of loophole???

2. I also wanted to ask whether it is fair that agricultural income is exempt, or is it a haven for politicians like sharad pawar who ownes acres of agricultural land in Maharashtra and Gujrat and anyway which farmer earns more than 160000 per year???.Also i read somewhere it is an easy way to convert black money into white by showing it as agricultural income and also is it fair for huge profit making companies like Tata Tea, Balrampur Chini who own agricultural land to pay tax on only 40% or whatever of their business profits

Replies (20)

Hareesh H Sharma

Cleared IPCC..now article

894 Points Joined September 2009

Hmmm interesting stuff.

But lemme ask u Devendra, When the director doesnt get any salary as cash, how can he pay the tax for the perq then. So may be thats why the lower of both is used for RFA. Anyway I would also like to know the answer

Devendra

Article

72 Points Joined June 2009

Thats my point the company dosent give any salary its paying rent for the director and still not taxing it in his hands where in the normal course it would be taxed in the hands of the employee if reasonable amount of salary would have been paid to him.In this case the company is just providing him an huge tax free perquisite and also getting a deduction.

My Queston is is the basis for valuation of perquisite correct in this case

Sunali

Learner

1317 Points Joined August 2008

Originally posted by :Devendra
"	Thats my point the company dosent give any salary its paying rent for the director and still not taxing it in his hands where in the normal course it would be taxed in the hands of the employee if reasonable amount of salary would have been paid to him.In this case the company is just providing him an huge tax free perquisite and also getting a deduction.My Queston is is the basis for valuation of perquisite correct in this case	"

In my opinion, the amount of rent can't be classified as a perquisite to employee...since employer-employee relationship doesn't exists as the director is not getting any salary as it is shown, however the company is only providing the director with tax free salary in form of rental payments...!!

The Harshit Aggarwal

B.Com(H) CS Final

5278 Points Joined April 2009

Agree with Sunali !!

Aashish Dinanath Tripathi

Articled Assistant and NCFM(CMDM)

233 Points Joined January 2009

Hey dude nice observation.

1. A director is not an employee (Except for MD and Working/whole time director)

2. No Salary means calculation of perquisite is irrelavant.

3. Till 31/03/2009 such an expense was charged under the ambit of FBT or Managerial Benefits.

4. But now If such an expense is recorded then it will be disallowed

5. In short such an expense if not taxable as income or perquisite to the director then such an expense will be dissallowed and thus taxable to the dummy company.

Please correct me if any errors polite suggestions welcomed.

Till then Have Phun and NJOY

Radhe Radhe

Hare Krsna

Aashish Dinanath Tripathi

Articled Assistant and NCFM(CMDM)

233 Points Joined January 2009

FOr your second question

1. Agri inc. is free of Tax yup thats an irony but true

2. Its definately a loop hole but cant do any thing

3. Tax abatement is required other such sectors which are the primary export articles will suffer a lot hence. Get rid of u r desparities.

Devendra

Article

72 Points Joined June 2009

Hi ashish Thanks for ur views.

But assume i pay very marginal salary and a lot of perquisite then??.Why would such an expense be disallowed?? if the rent agreement was in the name of the company but it was given to the director for his accomadation.And in this case the company had only two directors and no employees so i think i can assume its a whole time director can I ??

Also my point was that in this case the directors were using this as a way of avoidnig to pay tax on their perquisites.

Shiva Kumar

CA Final

208 Points Joined November 2009

The entire discussion is based on Section 17(2)(ii). If that is the sole consideration, Devendra is absolutely correct.

But we should also see clause (iii) in which the follwoing is treated as perquisite too.

Any amenity provided at an concessional rate or free to

a) To a director

b) to a person having subtanstial interest

So, your case will be squarely covered here and there is no link to salary in this scenario, hence even if the Salary is NIL, it will still be taxable.

Cool question, really loved it.

Thanks

Shiva

Aashish Dinanath Tripathi

Articled Assistant and NCFM(CMDM)

233 Points Joined January 2009

Ya devu u r observation is correct, Im not sure about the sections governing this peculiar case but if such an expense if not taxable as a perquisite/salary then such an expense will be dissallowed.

Ya u r contention is correct but i dont agree with tax avoidance as in absence of salary the employee-employer relation is absent

Every Concessional benefit is not a perquisite If at all in the previous years this treatment has been allowed by the AO then its purely his ignorance.

Shiva Kumar

CA Final

208 Points Joined November 2009

Originally posted by :Aashish Dinanath Tripathi
"	Ya devu u r observation is correct, Im not sure about the sections governing this peculiar case but if such an expense if not taxable as a perquisite/salary then such an expense will be dissallowed. Ya u r contention is correct but i dont agree with tax avoidance as in absence of salary the employee-employer relation is absent Every Concessional benefit is not a perquisite If at all in the previous years this treatment has been allowed by the AO then its purely his ignorance.	"

With due respects to Mr.Aashish

There is no link between an Income to one person and allowability to another person,

Eg:

1. Under 40(A)(3),payment exceeding Rs.20,000 in cash will be disallowed, but the same isstll taxable in the hands of the recepient.

2. On account of non deduction of tax, say under 194C, expenses will get disallowed under section 40(a)(ia), but the same is still taxable in the hands of the receiver.

Hence, LHS=RHS, hence proved that, taxablility in ones hand is no way related to the allowability of expenses in the other persons hand. The only exception to this

1. Partners remunartion

2. Interers on capital in a partnership firm.

Shiva

sudarshan

artical clerk

29 Points Joined May 2008

strictley speaking agricluture is taxed, if the person has any other income other than agriculture income .For the name sake its exemption. if you want you can check

Juzer Sadikot

CA - innovative solutions for Imports an

1309 Points Joined November 2008

Dear All,

A. Taxing RFA in the hands of employee (Director) shall amount to double taxation in case House is not owned by Employer, guess how??????

a. The company is paying rent to landlord; such rent receipt would be taxable in the hand of land lord.

b. Secondly company is claiming such expenses in the books of account as expenses (provided TDS u/s. 194I satisfied.

c. Now, if an Employee (director) is also required to pay tax fully/partly on same rental payment amount, doesn’t it amount to double taxation of same Income?

d. Answer of above may be "YES"

e. Crux, there would be nothing that IT Department is losing.

B. Now take a situation where employer own the house and giving to director as RFA.

a. Perqs valuation is based on % of salary.

b. No cash outflow

c. Employer is allowed to/shall charge Depreciation on such property

d. No recording of Income/expense otherwise than Depreciation on property

e. Now if the said property is sold by Employer then he would be required to pay tax on STCG i.e. difference between full value of consideration and block of assets which would be reduced by amount of Depreciation charged.

f. Crux, there would be nothing that IT Department is losing.

In view of above, It is possible to frame such transaction and one cannot say that other has evaded any tax.

Would be very much happy to get ur suggestions/comments on my views.

Thanks and Regards

Juzer