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Come to grips with the new regime

T. N. Manoharan
G. R. Hari

X LTD declares dividend of Rs 50 lakh on April 10, 2003. There are only five shareholders in the company and each one of them receives Rs10 lakh. What will be the tax consequence?

Solution: According to Section 115-O proposed to be introduced w.e.f. April 1, 2003, any dividend distributed by the company is subject to dividend tax at12.5 per cent. Therefore, in the given case, X Ltd shall pay a sum of Rs 6.25 lakh, being 12.5 per cent on Rs 50 lakh towards tax on dividend distribution. However, the recipient shareholders are exempt from tax in respect of such dividend by virtue of Section 10(34) proposed to be introduced. The Finance Bill, 2003 reverts to tax liability in respect of dividend in the hands of the company.

Beneficial ownership: Softwares Pvt. Ltd., a closely-held company, is eligible for tax benefit under Section10A of the Income-Tax Act. This company is amalgamated with Y Info Pvt. Ltd on June 1,.2003. Can Y Info continue to claim the benefit of deduction under Section 10A?

Solution: With effect from April 1, a new sub-section (7A) is proposed to be introduced under Section 10A. According to this, in case the beneficial ownership is diluted on account of amalgamation/demerger the tax benefit under Section10A shall be claimed only by the amalgamated/resulting company. It has also been made clear that during that year the amalgamating/demerged company is not entitled to Section10A benefit. Therefore, in this case Y Info, the amalgamated company, is entitled to continue the benefits of Section after amalgamation.

Tax rebate: The gross total income of Mr S for the financial year 2003-04 is Rs 1,40,000. He has contributed towards LIC, PPF and NSC aggregating to Rs 50,000. He spent Rs 20,000 towards college fees for his son's education. What is the amount eligible for rebate under Section 88 of the I-T Act.

Solution: Section 88, providing for tax rebate for contributions to certain specified items, is to include tuition fee, college/university fee paid for the children of the assessee. The amount eligible under this clause shall not exceed Rs 12,000 per child to a maximum of two children. Therefore, Mr S is eligible for rebate on Rs 62,000 being Rs 50,000 for investments and Rs 12,000 towards education expenditure of children.

TDS: Dr M, who is a chief cardiac physician, is subject to compulsory audit under Section 44AB of the I-T Act. He paid Rs 2 lakh to a catering contractor for supplying food for his son's wedding reception. Whether this payment is subject to tax deduction at source under the I-T Act?

Solution: As per Finance Bill, 2003, the TDS provisions are not applicable in case the subject matter of payments is exclusively for the personal activities of the assessee who is responsible for making such payment. Therefore, in the given case, Dr M. is not liable to deduct tax at source on the amount paid to catering contractor, since the same is towards his personal affairs. By virtue of this proposal, the applicability of TDS provisions to individuals and HUF is limited to the activities relating to their business/profession.

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