FINANCE & LAW TODAY: Loan to Director – Section 185

FINANCE & LAW TODAY: Loan to Director – Section 185: As per Section 185:  No Company ( Private & Public) Directly or Indirectrly Advance any loan, including book debt, to any of its  ...

FINANCE & LAW TODAY: Loan to Director – Section 185

FINANCE & LAW TODAY: Loan to Director – Section 185: As per Section 185:  No Company ( Private & Public) Directly or Indirectrly Advance any loan, including book debt, to any of its  ...

Loan to Director – Section 185

As per Section 185: No Company ( Private & Public)

• Directly or Indirectrly
• Advance any loan, including book debt,
• to any of its directors or to any **other person in whom the director is interested 
• Any guarantee or provide any security in connection with any loan taken by him or such other person

**TO ANY OTHER PERSON IN WHOM DIRECTOR INTERESTED MEAN :

i.Any other director of the lending company, or of the holding company of the lending company

ii. Any partner or relative of such director

iii. Any private company of which director is a director or member

iv. Body Corporate in which 25% or more voting power rests with one or more directors

v.  Body Corporate whose Board accustomed to act on directions of BOD or Directors of lending company.

S. No.	QUESTION & ANSWERS
A.	Can Loan given by Holding to Subsidiary?
	Assuming that directors of subsidiary co. (as well as “other persons in whom directors are interested”) do not hold any shares and are not director in holding co, Sec. 185 is not attracted.MAY NOT COVERED IN • Clause (c) (for Pvt Ltd co.,only if director is a director or member), • Clause (d) (only if the director either by himself or two or more such directors hold 25% or more of total voting power in the borrowing company) • Clause (e) (only if borrowing company /its Board/Directors are accustomed to act as per the Directors of the board/Directors of the lending company.) KINDLY NOTE THAT TO ATTRACT SEC. 185, ·         Any interest of director (or other person) in his “personal capacity (not holding as nominee of company)” is relevant. ·         Interest of holding co. in subsidiary is not relevant.
B.	Can Loan given by Subsidiary to Holding?
	Assuming that directors of holding co. (as well as “other persons in whom directors are interested”) do not hold any shares and are not director in subsidiary co, Sec. 185 is not attracted.MAY NOT COVERED IN • Clause (c) (for Pvt Ltd co.,only if director is a director or member), • Clause (d) (only if the director either by himself or two or more such directors hold 25% or more of total voting power in the borrowing company, • Clause (e) (only if borrowing company /its Board/Directors are accustomed to act as per the Directors of the board/Directors of the lending company. KINDLY NOTE THAT TO ATTRACT SEC. 185, ·         Any interest of director (or other person) in his “personal capacity (not holding as nominee of company)” is relevant. ·         Interest of holding co. in subsidiary is not relevant..
C.	Can Guarantee & Security provide by Holding Company to Subsidiary Company?
	Guarantee & Security can be provide by holding company in respect of Loanmade by Bank And Financial Institution to Subsidiary Company.Condition: Subsidiary use such loan for Principle Business Activity
D.	Non Applicability of Section 185 in case of Wholly Own Subsidiary Company.
	There is no restriction on giving Loan or Guarantees or Security by Holding Company to its Wholly Own Subsidiary (WOS) Company.
E.	Loan given in Ordinary Course of Business.
	A company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.Here Ordinary Course of Business means: (Source: A Ramaiya page No. 3308) i.  Something which is done as a matter of Corporate Historical practice is, as a matter of law, done “in the ordinary course of Business”. ii.   Whether a transaction has taken place “in the ordinary course business” was a matter to be determined objectively by reference to business practices in the commercial world, the ordinary operational activities of business as a going concern, the past practices of a company and its dealing with creditors. There is Two Test: If the company is engaged in lending activities regularity and  Lend not only to directors/directors’ entities but also to “arms’ length parties/unrelated parties Hence, All NBFCs may not be engaged in lending activities in Ordinary Course.
F.	Conditions for give loan in Ordinary Course of Business.
	1.      The Lending Company has in the past provided loans/guarantees/securities to such entities as a matter of routine. The frequency of such transactions and a certain amount of continuity is imperative as ‘business’ itself implies carrying on a particular trade or vocation as a ‘continuous’ activity by application of labour, skill and money to earn the income. Also, important is that such transactions have been appropriately disclosed in the financial statements of the Lending Company for the past years.  The disclosure of such transactions in the financial statement indicate that such activities were being carried on normally in the usual course of business, specifically inclusion of the amounts involved as ‘business income’ gives furthercredence to the fact. 2.      The memorandum of association of the Lending Company allows for such transactions i.e. the providing of loans/guarantees/security to other entities should be part of at least the incidental or ancillary objects of the memorandum of association. The Courts have not been uniform in their ruling with respect to the significance of the objects clause of the memorandum of association in making this assessment. The Courts also differ on whether an activity is in ‘ordinary course’ only if part of the main objects is or whether an activity ancillary to the main objects may also be considered so. ·         The Lending Company has passed a board resolution, specifically, categorizing the transaction as being in ‘ordinary course of businesses. Also, the board should have examined the transaction from the perspective of Section 185 and should have resolved to undertake the same. The consent of all the directors present at the meeting should have been obtained in accordance with Section 186 (5) of the Act. Whether a transaction is in the ‘ordinary course of businesses is a question of fact and a board resolution is important in making this assessment.
G.	What are the planning for sec 185?
	1) Convert  both Lender co & receiver co to LLP or2) Convert other co (to whom loan is given) to public Ltd to enjoy 25% limit or 3) Rearrange shareholding pattern & directorship pattern: a) Appoint new directors in lender Co, who personally neither hold any share in Other company nor are directors in other co. If their relatives holds shares or are directors than there is no problem or b) One can gift  shares to other relative to rearrange shareholding pattern
H.	How to rearrange shareholding & Directorship pattern as referred in Q-F above?
	Suppose A,B,C,D are 4 members in a family. They have 2 Cos: A Pvt Ltd & C Pvt Ltd.i)  We can appoint A& B as directors of A Pvt Ltd. & gift all shares in name of C & D in A Pvt Ltd to A & B. ii) We can appoint C& D as directors of C Pvt Ltd  & gift all shares in name of A & B in C Pvt Ltd to C & D.
I.	Is Loan given before 12th Sep, 2013 affected by sec 185?
	Existing loan/guarantee/security provided before 12th Sep, 2013 is not affected by above provisions. However, it should not be renewed & should be repaid on due date.
J.	Possible Situations for Giving Loan, Guarantee and Security?
	Ø  Giving Loan in ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.  Ø  Change Composition of Board of Borrowing Company: In such a manner that the Director of lending Company are neither the Director nor the shareholder in the Borrowing Company. Ø  Making Borrowing Company as WOS of Lendig Company. Ø  Converting Group partnership firms and Private Limited Companies into LLP. Ø  Converting group private limited company into public limited company and restructuring the Board in such a manner that the voting power of common directors kept below 25% in such Public Limited Company.
K.	Punishment for violation of Section 185.
	According to sub-section 2 of Section 185 of the Act, if any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1):  (a) The Company shall be punishable with fine which shall not be less than 5 lakh rupees but which may extend to 25 lakh rupees, and (b) The Director Or The Other Person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to 6 months or with fine which shall not be less than 5 lakh rupees but which may extend to 25 lakh rupees, or with both.
L.	“to other persons in whom directors are interested”
	i. Individualii. Director of lending company ; [ABC Limited has given the loan to A, Director of ABC Limited] b. Director of a company which is its holding company ; [PQR Limited is holding company of ABC Ltd, ABC Ltd has given the loan to P, director of PQR Limited] c. Any partner of any such director ; [ABC Limited has given the loan to D, Partner in AD Partnership Firm in which A and D are partner and A is also director of ABC Limited] d. Relative of any such director ; [ABC Limited has given the loan to E, Relative of Directors of ABC Limited] Firm : a. in which any such director is a partner; [ABC Limited has given the loan to AD Partnership Firm in which A and D are partners and A is also director of ABC Limited] b. in which any relative of such director is a partner [ABC Limited has given the loan to DE Partnership Firm in which E and D are partners and E is Relative of director of ABC Limited] Private Limited Company : a. of which such director is a director [ABC Limited has given the loan to XYZ Limited in which A is director of ABC Limited and XYZ Limited i.e. common director] b. of which such director is a member; [ABC Limited has given the loan to XYZ Limited, where A is member of XYZ Limited and is also director of ABC Limited]
M.	Definition of “body corporate’’
	Body corporate means as defined u/s 2(11) of the act. It is inclusive definition. Section 2(11) of the companies act 2013 defines ’body corporate’ or “corporation” includes a company incorporated outside India, but does not include-i. a co-operative registered under any law relating to co-operative societies: and ii. any other body corporate (not being company as defined in this act), which the central government may, by notification, specify in this behalf: The term “body corporate “is wider than the expression  “company “and is used in several section of  the act to denote not only a company incorporated in India but also a foreign company .it includes a corporation formed under any special law of Indian or a foreign country ,except as expressly excluded by the definition. It includes all public financial institutions mentioned in section 4A of the act as well as  nationalized banks incorporated under section 3(4) of the banking companies (acquisition and transfer of undertaking) Act.1970.  However, it excludes a body corporate, which is not a company under the act and which is specified by the central government in the notification in official gazette.
N.	Is receiving of Share Application and Advance covered u/s 185?
	Here is no contravention of sec 185 if share application money/advance for property/goods/services is given to specified person u/s 185. However, private placement provisions have to be complied, if share application money is given on or after 1st April, 2014.
O.	Can company give loan to member of Company?
	The Company can give the loan to member of the company subject to not relative of director of the company.
P.	Offence done under Section 185 is compoundable or not?
	The offence committed under this section is compoundable in accordance with the provisions of section 441 of the Act.

IMPORTANT NOTE:

loan given in the ordinary course of business.

Any loan advanced or guarantee/security provided by a company, which in its ordinary course of business provides loans or gives guarantees or securities for repayment of any loan, provided that such loans shall not be provided at an interest rate less than the bank rate declared by the Reserve Bank of India. No loan may be given by the Lending Company at an interest rate lower than the prevailing yield of one year, three year, five year or ten year government security closest to the tenor of the loan. The phrase ‘ordinary course of business’ has also not been defined under the Act. This is because there can be no universal meaning ascribed to it. What is ordinary for one entity or one type of business or one sector or even one region may not be so for another.

However, based on judicial precedents and keeping in view the intent and purpose of the provision, a transaction can be said to be in ‘ordinary course of business’, if:

1. The Lending Company has in the past provided loans/guarantees/securities to such entities as a matter of routine. The frequency of such transactions and a certain amount of continuity is imperative as ‘business’ itself implies carrying on a particular trade or vocation as a ‘continuous’ activity by application of labour, skill and money to earn the income.Also, important is that such transactions have been appropriately disclosed in the financial statements of the Lending Company for the past years.

The disclosure of such transactions in the financial statement indicate that such activities were being carried on normally in the usual course of business, specifically inclusion of the amounts involved as ‘business income’ gives further credence to the fact.

2. The memorandum of association of the Lending Company allows for such transactions i.e. the providing of loans/guarantees/security to other entities should be part of at least the incidental or ancillary objects of the memorandum of association.The Courts have not been uniform in their ruling with respect to the significance of the objects clause of the memorandum of association in making this assessment. The Courts also differ on whether an activity is in ‘ordinary course’ only if is part of the main objects or whether an activity ancillary to the main objects may also be considered so

• The Lending Company has passed a board resolution, specifically, categorizing the transaction as being in ‘ordinary course of businesses. Also, the board should have examined the transaction from the perspective of Section 185 and should have resolved to undertake the same. The consent of all the directors present at the meeting should have been obtained in accordance with Section 186 (5) of the Act.Whether a transaction is in the ‘ordinary course of business’ is a question of fact and a board resolution is important in making this assessment

3. The loan documents/security documents executed for the purpose of the loan/security/guarantee provided by the Lending Company should contain a clause stating that the transaction contemplated therein is in ‘ordinary course of business’.

4. The transaction should be conducted at arms’ length basis and appropriate disclosures should be made with respect to the interest of any management of the Lending Company in the entity receiving the loan, guarantee or security.Ultimately the aim of Section 185 is to prohibit related party transactions where the Lending Company provides undue advantage or gain to any other entity related to the management of the Lending Company and to avoid conflict of interest scenarios for directors of such Lending Company.

5. The Lending Company (not if it is a banking company or an insurance company or a housing finance company providing the loan/security/guarantee in ordinary course of business or company engaged in business of financing of companies or of providing infrastructural facilities should have complied/should comply with conditions under Section 186 of the Act.

Regards
K.K Singh

FINANCE & LAW TODAY: A brief Study on International Taxation

FINANCE & LAW TODAY: A brief Study on International Taxation: I NTRODUCTION: International taxation in a simple language means the study of Taxation beyond the National Level. Though we all are ve...

A brief Study on International Taxation

INTRODUCTION:

International taxation in a simple language means the study of Taxation beyond the National Level. Though we all are very much aware about our Indian Taxation Laws but as time is demanding something more so, there is a need to study the taxation at another level.

Here, my main motive of writing this article is to make CA students feel comfortable with the international taxation laws as it is not a new thing but an old thing which is going to be present in a new shape in the form of syllabus. I am using a word old thing because India is not new in the scope of International Taxation as Already, our country is having taxpayers in the form of big MNC’s, big business tycoons who are regularly doing international transactions and the main thing is that some of them are situated outside India but due to Indian taxability criteria, their income is assessed by Indian taxation department. The CA students who are pursuing their articleship from the big companies may already get aware of this concept but still that students covers only approx. 10% of total CA students who are in their articleship period. So, there is a strong need to convey the importance, means & methods, policies of international taxation to them.

Let us start with this topic:

                                                                   Basics:

International taxation is the study or determination of tax on a person or business subject to the tax laws of different countries or the international aspects of an individual country’s tax laws as the case may be.

For detailed study of this topic we have to understand the tax provisions already prevailing in India:

1) Indian income tax provisions related to Non Residents:

Residential status of a person describes the taxability of that person in a county but in the case of Non-resident only that Income which is received or deemed to have been received in India by or on his behalf and income that accrues or arises or is deemed to accrue or arising in India is Taxable in India.

Section 9 of the Income Tax Act, 1961 also envisages certain deeming provisions.

As per the deeming provisions following Incomes will be deemed to accrue or arise in India, even though they may actually accrue or arise out of India :-

1. Income from Business Connection in India.
2. Income from any Property, Asset or Source of Income in India.
3. Capital Gains from transfer of any Capital Asset situated in India.
4. Income from Salary earned in India – i.e. if Service is rendered in India. Where a rest period which is preceded or succeeded by services rendered in India forms part of the service contract of employment, the same shall be considered to be income earned in India.
5. Income from salary (other than perquisite &/or allowance ) paid by Government of India to an Indian Citizen of India even though the service is rendered out of India.
6. Dividend paid by Indian Company outside India.
7. Income by way of Interest in some situations.
8. Income by way of Royalty in some situations.
9. Income by way of Fees for Technical Services in some situations.

2) NRI Tax Exemption

NRI’s are taxed as per income tax slabs applicable to resident Indians below the age of 60 years irrespective of the age criteria of non resident indian. Simply means that if the NRI is above the age of 60 years still he will be taxed a per tax rate applicable to resident indian who is below the age of 60 years.

But, in the following two cases NRIs need not to file tax return:

• If taxable income consists of only investment income or long term capital gains.
• When the tax has already been deducted at source, on such income.

Besides the above benefits, NRI’s are also granted with some tax free incomes which are notified by Income Tax department as follows:

• Interest earned on Saving Certificates etc.
• Interest earned on Non Resident (Non Repatriable) [NRNR] Deposit.

** Note – w.e.f. 1st April,2002 banks cannot accept fresh nor renew NRNR deposits. Upon maturity Interest on NRNR deposits and principal amount can be transferred to Non Resident (External) [ NRE] account at the option of account holder.

• Interest earned on Foreign Currency Non Resident (Bank) [FCNR(B)] Deposit which technically is exempt under Section 10(4)(ii) too being covered by the definition of an NRE deposit under the FERA 1973 in case of a ” Non Resident ” or “Resident but Not Ordinarily Resident” as per the provisions of Income Tax Act, 1961.
• Interest earned on Foreign Currency Non Resident (Bank) [FCNR(B)] Deposit continued until maturity by a Non Resident Indian (NRI) who has returned to India for taking up employment , business, vocation i.e. for permanent settlement provided he is a ” Non Resident ” or “Resident but Not Ordinarily Resident” as per the provisions of Income Tax Act, 1961. Overseas income of NRIs.
• Dividend income from Indian Public/Private Company, Indian Mutual Fund and from Unit Trust of India is exempt from tax in India at par with residents.
• Long-term capital gains arising on transfer of equity shares traded on recognized Stock Exchange and units of equity schemes of Mutual Fund is exempt from tax at par with residents, provided Security transaction tax is paid.
• Remuneration or fee received by non-resident / non-citizen / citizen but not ordinarily resident ‘consultants’, for rending technical consultancy in India under approved programme including remuneration of their employees, and income of their family members which accrue or arise outside India.
• Interest on notified bonds.

                    TAX DEDUCT AT SOURCE (TDS) provisions related to NRI’s:

3) TDS provisions

Finance Act, 2008 inserted a new sub section (6) to section 195 effective from April 1, 2008, which requires the person responsible for making payment to a non-resident to furnish information relating to such payments in forms to be prescribed.

The Central Board of Direct Taxes (“CBDT”) has now, by notification No 30/2009 dated March 25, 2009, prescribed a new rule 37BB in the Income Tax Rules, 1962 (“the rules”) prescribing Form 15CA and Form 15CB to be filed in relation to remittances to non-residents under section 195(6) of the Income Tax Act, 1961 (“the Act”). This new rule is effective from July 1, 2009 and shall apply to all remittances being made after July 1, 2009.

The process that will have to be followed, before any remittance can be made, is as under:

Step 1 : Obtain a certificate from a Chartered Accountant in Form No 15CB

• Certificate in Form 15CB is not required when remittance does not exceed Rs 50,000 (single transaction) and Rs 2,50,000 (in total in a financial year).

Step 2 : Furnish the information in Form No15CA

Step 3 : Electronically upload Form 15CA on the designated website

Step 4 : Take Print out of Form 15CA and file a signed copy

Step 5 : Remit money to the Non Resident

There is a very common doubt which generally strike the minds of students that is Double Taxation of money. Generally people thinks that if a NRI is paying a tax in the country in which he is a non resident then the country of his residence will also demands tax from that person for that income. But if this happens this will leads to double taxation. The thinking of students or other people is absolutely right as the law interprets the same but Law is always a step ahead from our minds. Law already found a way so as to avoid double taxation of income in case of NRI’s and that amazing thing is DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA)

4) What is DTAA?                   

 DOUBLE TAXATION AVOIDANCE AGREEMENT (DTAA) is an agreement signed between two countries/nations for resolving the issues of taxability of income and increased transparency to avoid tax evasion.

5) Why DTAA?

Every country has its own taxation structure according to which they determines the taxability of people residing there and also taxability of the people who does not belongs to their country but with some means they are related to their nation in their form of assessee or deemed assessee.

So, for recoverability of tax from the income generated in other nations by NRI’s DTAA was formed and secondly, to ensure that this taxability of income does not lead to double taxation of Same income in both the countries.

6) Objectives of DTAA:

• Tax Credit / Relief
• Avoid Double Taxation
• Prevent Tax Discrimination
• Certainty of Tax Treatment to Investors
• Exchange of Information
• Ease in Recovery of Tax Dues
• Promote Investment & Mutual Relation
• Prevent Fiscal Evasion

Presently, India has the DTAA with more than 85 countries.

This states that if a NRI is a resident in any of those 85 countries and he/she is paying taxes on income earned then he will be eligible for a tax benefit in either of the following two ways:

• Exemption method: under this method, any one country will tax the income of NRI. Means if the income is taxed in India then the same income will not be taxed in his own country.

• Credit method: under this method, both the countries will tax the income of that person but the country where he is a resident will allow him deduction or give credit to the foreign tax.

                                             NRI’s Taxability

7) Computation Of Income Of NRI’s (Section 115D):

Section 115D deals with the Special provision for computation of total income of non- residents, this section states that:

(1) No deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the investment income of a non- resident Indian.

(2) Where in the case of an assessee, being a non- resident Indian,-

(a) the gross total income consists only of investment income or income by way of long- term capital gains or both, no deduction shall be allowed to the assessee under Chapter VIA and nothing contained in the provisions of the second proviso to section 48 shall apply to income chargeable under the head “Capital gains”

(b) the gross total income includes any income referred to in clause (a), the gross total income shall be reduced by the amount of such income and the deductions under Chapter VIA shall be allowed as if the gross total income as so reduced were the gross total income of the assessee.

8) Tax on investment income and long-term capital gains (Section 115E)

Where the total income of an assessee, being a non-resident Indian, includes—

(a) any income from investment or income from long-term capital gains of an asset other than a specified asset;

(b) income by way of long-term capital gains,

The tax payable by him shall be the aggregate of—

• the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income, at the rate of 20%;
• the amount of income-tax calculated on the income by way of long-term capital gains referred to in clause (b), if any, included in the total income, at the rate of 10%; and
• the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b).

9) Capital gains on transfer of foreign exchange assets not to be charged in certain cases (section 115F):

Where, in the case of an assessee being a non-resident Indian, any long-term capital gains arise from the transfer of a foreign exchange asset and the assessee has, within a period of six months after the date of such transfer, invested the whole or any part of the net consideration in any specified asset, or in any savings certificates referred to in clause (4B) of section 10, the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,—

(a) If the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;

(b) If the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of acquisition of the new asset bears to the net consideration shall not be charged under section 45.

Foreign Exchange Asset:

Section 115C defined “foreign exchange asset” to be any specified asset, which was acquired by the assessee using convertible foreign exchange and the said specified asset as per sub-section (f) of the same Section included shares with an Indian company.

Specified assets are:

• Shares of an Indian company
• Debentures or deposits with an Indian company, not being a private company
• Any security of the Central Government.
• Other notified assets (no such asset has yet been notified.)

10) Benefit available in certain cases even after the assessee becomes resident (Section 115H):

Where a person, who is a non-resident Indian in any previous year, becomes assessable as resident in India in respect of the total income of any subsequent year, he may furnish to the Assessing Officer a declaration in writing along with his return of income under section 139 for the assessment year for which he is so assessable. Some conditions are required to be fulfilled for availing this benefit.

11) International taxation: A different law???

This can be a doubt in the mind of anybody who wants to study all aspects of international taxation. So, let me clarify this:

• There is no any different law for studying international taxation.
• There is no any separate courts for the matters related to international taxation.
• The Income Tax Act, 1961 specifies certain separate provisions for the taxability of foreign transactions.
• The Provisions of Domestic law are applied to handle Cross Border – Direct & Indirect Taxes

                                                          CONCLUSION

The emerging globalisation is proved as a boost to Indian economy and accordingly it puts a challenge against Indian Taxation Authorities so as to ensure the collectability of dues pertaining to international transactions. But while observing the other side of this picture it seems that this is not a difficult task as Indian chartered Accountants are competent enough to deal with critical taxation issues. Here, taxation department should take an initiative to delegate the work to Chartered Accountants so that the correct picture of transactions can be ascertained and the tax evasion can be prevented.

Regards
KK.SINGH

FINANCE & LAW TODAY: Salary Income- Exempt Allowance under section 10(1...

FINANCE & LAW TODAY: Salary Income- Exempt Allowance under section 10(1...: Meaning of allowance Allowance is generally defined as fixed quantity of money or other substance given regularly  in addition  to sal...

Salary Income- Exempt Allowance under section 10(14)

Meaning of allowance

Allowance is generally defined as fixed quantity of money or other substance given regularly in addition to salary for the purpose of meeting some particular requirement connected with the services rendered by the employee or as compensation for unusual conditions. It is fixed, pre-determined and given irrespective of actual expenditure

Under income tax act for exemption purpose allowances are categorized under three heads. One of the commonly used category is allowances which are based on actual amount expended by an employee. Here an attempt is made to understand types & nature of such allowances and per se the extent of exemption available for these allowances.

Special allowance prescribed as exempt under section 10(14)

When exemption depends upon actual expensiture by the employee – The following allowances are exempt under section 10(14) to the extent the amount is utilised for the specified purpose for which the allowance is received . In other words, in the cases given below the amount of exemption under section 10(14) is_

1.  The amount of the allowance ; or

2. The amount utilised for the specific purpose for which allowance is given,

whichever is low .

Exemption is available on the aforesaid basis in the case of following allowances-

Name of the allowance	Nature of allowance
Travelling allowance/transfer allowance	Any allowance (by whatever name called) granted to meet the cost of travel on tour or on transfer(including any sum paid in connection with transfer, packing and transportation of personal effects on such transfer).
Conveyance allowance	Conveyance allowance granted to meet the expenditure on conveyance in theperformance of duties of an office Note pls.: Expenditure for covering the journey between office and residence is not treated as expenditure in performance of duties of the office and, consequently, such expenditure is not exempt from tax under this section. This allowance is covered separately under “Transport allowance” where a fixed exemption uptoRs 800 per month is given to such allowances in case of all employees. However, with introduction of finance act 2015 such exemption is increase to Rs. 1600 per month with prospective effect. Example: Conveyance allowances given to an employees for travelling done by employee for attending income tax hearing for presenting income tax hearing
Daily allowance	Any allowance whether granted on tour or for the period of journey in connection with transfer, to meet the ordinary daily charges incurred by an employee on account of absence from his normal place of duty.
Helper allowance	Any allowance (by whatever name called) to meet the expenditure on a helper where such helper is engaged for the performance of official duties.
Research allowance	Any allowance (by whatever name called) granted for encouraging theacademic research and other professional of official duties.
Uniform allowance	Any allowance (by whatever name called) to meet the expenditure on the purchase or maintenance of uniform for wear during the performance of duties of an office. Pls. note: Benefit under this allowance can be taken only when a specific uniform is prescribed for office duties.

As stated earlier, the amount of exemption in the above cases isthe amount of allowance or the expenditure incurred for the specific purpose for which allowance is given,whichever is lower.

Kindly attention:

It is not open to the Assessing Officer to call for the details of expenses actually incurred by the assesse unless the allowances are disproportionately high compared to the salary received by the assessee or unreasonable with reference to the nature of the duties performed by the assessee.

So as far as allowance given are in normal proportion to the gross salary given to employee, employee need not to maintain the account and kept documents to proof is stand of actual expenses incurred for the aforesaid purpose. A simple declaration is enough to claim such exemption.

Best Regards

K.K.SINGH